<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange act
of 1934
For the fiscal year ended December 31, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to __________
Commission File Number 0-22-093
SCOTT CABLE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 75-1766202
----- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. IDENTIFICATION NO.)
EMPLOYER INCORPORATION OR ORGANIZATION)
Four Landmark Square, Suite 302, Stamford, CT 06901
----------------------------------------------- ------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (203) 323-1100
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock $0.10 par value
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of Class A, Class B, and Class C common stocks held by
non-affiliates of the Registrant as of April 10, 1998 is: Not Applicable
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes X No
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at April 10, 1998
<S> <C>
Class A Common Stock, $0.10 par value 1,000
Class B Common Stock, $0.10 par value 24,000
Class C Common Stock, $0.10 par value 75,000
</TABLE>
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC.
FORM 10-K
December 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
<S> <C>
Item 1 Business........................................................ 2
Item 2 Properties......................................................19
Item 3 Legal Proceedings...............................................20
Item 4 Submission of Matters to a Vote of Security Holders.............21
Executive Officers of the Registrant
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters...............................22
Item 6 Selected Financial Data.........................................24
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of Operations..............25
Item 7a Quantitative and Qualitative Disclosures About Market Risk......33
Item 8 Financial Statements and Supplementary Data.....................34
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................49
PART III
Item 10 Directors and Executive Officers of the Registrant..............49
Item 11 Executive Compensation..........................................54
Item 12 Security Ownership of Certain Beneficial Owners and Management..55
Item 13 Certain Relationships and Related Transactions..................59
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................................61
SIGNATURES ............................................................64
</TABLE>
Forward-Looking Statements
Certain statements contained in this Annual Report including, without
limitation, statements containing the words "believes", "anticipates", "may",
"intends", "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company (or industry results, performance or
achievements) expressed or implied by such forward-looking statements to be
substantially different from those predicted. Such factors include, among
others, the following: general economic and business conditions, both nationally
and in the regions in which the Company operates; competition; changes in
business strategy or development plans; and the Company's inability to obtain
sufficient financing to continue operations, if necessary. Certain of these
factors are discussed in more detail elsewhere in this Annual Report.
<PAGE>
PART I
ITEM 1. BUSINESS.
General
Scott Cable Communications, Inc. ("Scott" or the "Company") is engaged
in the ownership and operation of cable television systems in suburban and rural
markets in the United States. As of March 31, 1998, Scott owned and operated
twenty-four systems, serving approximately 78,000 subscribers and passing
approximately 120,000 homes located in ten states (Arkansas, California, Texas,
Colorado, Louisiana, New Mexico, Ohio, North Dakota, Virginia and Nebraska). All
of the Company's systems are located in areas that are in reasonably close
proximity to systems operated by major multiple system operators. The Company's
systems are operated under the trade name American Cable Entertainment.
The Company's systems currently offer customers various levels of
cable services consisting of a combination of broadcast television signals
and satellite television signals. For an extra monthly charge, the Company's
systems also offer "premium" television services to their customers. These
services (such as Home Box Office-Registered Trademark-, Cinemax-Registered
Trademark-, Showtime-Registered Trademark- and The Movie Channel-Registered
Trademark-) are satellite-delivered channels that consist principally of
feature films, live sporting events, concerts and other special entertainment
features, presented without commercial interruption. The service options
offered vary from system to system, depending upon a system's channel
capacity and viewer interests. Rates for services also vary from market to
market and according to the type of services selected. Substantially all of
the Company's systems currently offer a "broadcast basic" package, one or
more satellite service tiers and several premium services. Subscribers may
choose various combinations of such services.
The Company's systems are located in suburban and rural markets. The
Company believes non-urban systems generally involve less economic risk than
systems in large urban markets since service in non-urban markets is often
necessary to receive a wide variety of television signals (including local
broadcast stations) and non-urban markets typically offer less competitive
entertainment alternatives than urban markets. The Company also believes that
non-urban systems have lower labor, marketing and system construction costs and
higher and more predictable operating cash flow margins than systems in large
urban markets.
The cable television industry is subject to extensive governmental
regulations at the federal, state and local levels. In June 1995, the Federal
Communications Commissions (the "FCC") extended relief from the rate regulatory
provisions of the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act") to small cable operators such as the Company,
thereby enabling greater flexibility in establishing service rates. In February
1996, Congress enacted the 1996 Telecommunications Act (the "1996 Telecom Act")
which, among other things, deregulated all levels of service, except broadcast
basic service, to small cable operators such as the Company.
The Company does not have any current plans to offer direct broadcast
satellite services, whether directly or through third parties, to subscribers in
systems it currently owns.
2
<PAGE>
The Company's executive offices are located at Four Landmark Square,
Suite 302, Stamford, Connecticut 06901. The Company's telephone number is (203)
323-1100. Scott was incorporated in Texas on May 14, 1981.
Recent Development
The Company has received an unsolicited offer from a third party to buy
substantially all of its assets for cash, and is in the process of
negotiating a definitive asset purchase agreement. There can be no assurance
that the parties will enter into an agreement or, if such agreement is
entered into, that the transaction will be consummated. The anticipated sale
proceeds from any such transaction would not be adequate to pay all of the
Company's indebtedness in full.
Background
In January 1988, Simmons Communications Merger Corp. merged (the
"Merger") with and into the Company pursuant to a merger agreement whereby each
share of common stock of the Company was converted into the right to receive
$27.25 in cash or approximately $129.3 million in the aggregate. As a result of
the Merger, the Company became highly leveraged.
In October 1992, the 1992 Cable Act was enacted and the FCC imposed
extensive regulations on the rates charged by cable television owners and
operators. Beginning in 1993, the Company's revenue and cash flow were adversely
impacted by these regulations as the Company was required to reduce many of its
service rates effective September 1993 and again in August 1994.
In 1993, the Company extended the maturity date of its senior
indebtedness to November 1995 and in conjunction with such extension, agreed to
make principal payments of $15 million in January 1994 and $18 million in March
1995. As part of the Company's efforts to satisfy these mandatory payment
obligations and provide additional working capital, Scott sold cable systems
located in Rancho Cucamonga, California in January 1994 for $23.6 million and
Missouri, Oklahoma, Kansas and northern Texas for $12.4 million in February
1995.
In October 1995, the Company failed to make an interest payment on its
outstanding subordinated debentures and in November 1995, the Company's senior
secured debt aggregating approximately $34.4 million matured and the Company
failed to pay such debt on maturity. The Company entered into 90-day standstill
agreements with holders of its senior bank loans and notes and holders of its
senior subordinated notes in order to seek refinancing alternatives; however,
the Company was unable to refinance its obligations or negotiate a restructuring
on favorable terms prior to the expiration of the agreements.
Bankruptcy Proceedings
In February 1996, the Company, together with Ace-Texas, Inc., Ace-East,
Inc., Ace-U.S., Inc., Ace-South, Inc., Ace-West, Inc., and Ace-Central, Inc.,
all of which were holding companies whose only assets were the then issued and
outstanding shares of capital stock of the Company (collectively the "Holding
Companies" and together with the Company, the "Debtors"), filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code, as
amended (the "Bankruptcy Code"), with the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On August 29, 1996, the Debtors
filed their Joint Plan of Reorganization, and on October 23, 1996 and November
1, 1996, respectively, the Debtors filed their First and Second Amended Joint
Plan of Reorganization. During this period, the Company sought
3
<PAGE>
new financing to replace approximately $62.3 million of debt which had matured
and negotiated new terms for approximately $88.4 million of subordinated and
junior subordinated debt, including the deferral of cash interest payments for
several years. On December 6, 1996, the Bankruptcy Court confirmed the Debtors'
Second Amended Joint Plan of Reorganization, as modified (the "Plan of
Reorganization" or the "Plan") and the Plan became effective on December 18,
1996.
The purpose of the Plan was to enable the Company to refinance a
portion of its debt and restructure a portion of its debt in order to extend
maturities and enhance the Company's value through anticipated cash flow growth
during the succeeding several years. The Plan of Reorganization generally
provided for (i) the Company's continued operations; (ii) the consummation of a
senior, secured credit facility for up to $67.5 million in loans for cash
distributions to creditors and working capital; (iii) the payment in full in
cash of allowed claims of holders of the Company's senior secured credit
agreement and senior secured notes aggregating approximately $31.4 million,
holders of the senior secured subordinated notes aggregating approximately $17.6
million and unsecured zero coupon notes aggregating approximately $13.3 million;
(iv) the issuance of an aggregate of $49.5 million in 15% Senior PIK Notes (as
defined herein) due March 18, 2002, which are secured by, among other things, a
second lien on substantially all of the Company's real and personal property, an
undivided interest in 15% of an aggregate of $38.9 million in 16% Junior PIK
Notes (as defined herein) due July 18, 2002, which are secured by, among other
things, a third lien on substantially all of the Company's real and personal
property, cash and 75,000 shares of Class C Common Stock in full satisfaction of
allowed claims of holders of 12 1/4% unsecured public subordinated debentures
due April 15, 2001 in the aggregate amount of $55.1 million, which includes
accrued interest ("Class 6"); (v) the issuance of 85% of the Junior PIK Notes
and 24,000 shares of Class B Common Stock in full satisfaction of allowed claims
of holders of 10% unsecured junior subordinated notes due November 15, 2003 in
the aggregate amount of $30.3 million ("Class 7"); (vi) the payment in cash of a
pro rata share of $100 to each holder of the Company's equity securities prior
to the bankruptcy filing and the cancellation of such stock ("Class 15"); and
(vii) the issuance of 1,000 shares of Class A Common Stock to the manager of the
Company's systems. Holders of claims of Classes 6 and 7 received distributions
of reorganization securities (and, in the case of Class 6, a cash payment of
$6,087,153) based upon available cash, projected cash flow and continued
operations of the Company. Holders of Class 15 interests in Scott prior to the
reorganization of the Company received an aggregate of $100 in cash. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 12. Security Ownership of Certain Beneficial Owners and
Management."
The Bankruptcy Court required the Company to put $387,000 in escrow
pending the resolution of a claim by certain of the Company's former Senior
Secured Noteholders. The claim included interest computed at the default rate on
the then outstanding Senior Secured Notes. The Company filed its objection to
the claim on March 18, 1997. On March 17, 1998 the Court ruled in favor of the
former Senior Secured Noteholders. As a result of such ruling the Company will
release a portion of the cash in escrow to those former Noteholders. Such
amounts were substantially accrued during 1996.
4
<PAGE>
Cable Television Systems
A cable television system receives television, radio and data signals
at the system's "headend" by means of off-air antennas, microwave relay systems
and satellite earth stations. These signals are then modulated, amplified and
distributed, primarily through coaxial and fiber optic distribution systems, to
deliver a wide variety of channels of television programming, primarily
entertainment and informational video programming, to the homes of subscribers
who pay fees for this service, generally on a monthly basis. A cable television
system may also originate its own television programming and other information
services for distribution through the system. Cable television systems generally
are constructed and operated pursuant to non-exclusive franchises or similar
licenses granted by local governmental authorities for a specified period of
time.
A customer generally pays an initial installation charge and fixed
monthly fees for basic and premium television services and for other services
(such as the rental of converters and remote control devices). Such monthly
service fees constitute the primary source of revenues for the systems. In
addition to customer revenues, the systems receive revenue from additional fees
paid by customers for pay-per-view programming of movies and special events and
from the sale of available advertising spots on advertiser-supported
programming. The systems also offer to their customers home shopping services,
which pay the systems a share of revenues from sales of products in the system's
service area.
The Systems
The Company's systems are divided into nine separate operating groups
or systems located in ten states. All of the Company's systems are located in
areas that are in reasonably close proximity to systems operated by major
multiple system operators. The following is a summary of certain operating data,
as of December 31, 1997, with respect to each system:
<TABLE>
<CAPTION>
Percentage
Operating Groups Homes Basic Basic Premium Premium of Total
or Systems Passed Subscribers Penetration Units Penetration Subscribers
- ---------------- ------- ----------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alamogordo 23,611 13,869 58.7% 3,908 28.2% 17.8%
Bellefontaine 11,279 7,513 66.6% 2,294 30.5% 9.7%
Chadron 5,634 3,980 70.6% 1,379 34.6% 5.1%
Cortez 2,910 2,084 71.6% 835 40.1% 2.7%
Dickinson 6,734 5,276 78.3% 940 17.8% 6.8%
Marksville 17,285 12,207 70.6% 3,026 24.8% 15.7%
Suburban Houston 31,755 16,232 51.1% 9,490 58.5% 20.8%
Radford 15,938 12,464 78.2% 3,565 28.6% 16.0%
Tahoe 5,036 4,212 83.6% 849 20.2% 5.4%
------- ------ ------ -----
Total 120,182 77,837 64.8% 26,286 33.8% 100.0%
</TABLE>
Alamogordo Group. The Alamogordo group is comprised of four systems
in New Mexico serving the communities of the City of Alamogordo (including
Holloman Air Force Base and Tularosa), High Rolls, Carrizozo and Truth or
Consequences ("TC"). This group has four headends serving seven franchises,
the earliest of which is scheduled to expire in 2003. As of December 31,
1997, the Alamogordo group passed 23,611 homes and served 13,869 subscribers,
5
<PAGE>
representing approximately 17.8% of the total subscribers in the Company's
systems. Basic penetration in the Alamogordo group as of such date was
approximately 58.7%.
The system serving the City of Alamogordo is the largest of the
Alamogordo group, serving over 70% of the plant miles from a single headend and
one microwave receive site. The portion of the system serving the City of
Alamogordo and Holloman operates at 550 MHz, has a channel capacity of 78 and
currently uses 60 channels. The Tularosa portion of the system operates at 450
MHz, has a channel capacity of 62 and currently uses 60 channels. The Carrizozo
system passes 330 MHz, has the capacity to carry 42 channels and currently uses
25 channels. The TC system is operating at 330 MHz, has a capacity to carry 42
channels, and currently uses 39 channels. The High Rolls system is capable of
carrying 42 channels and currently uses 21 channels.
The communities served by the Alamogordo group are situated in the
southern portion of New Mexico, about 100 miles north of Las Cruces. The Company
believes that the military bases of White Sands and Holloman have a significant
influence on the economy in the area covered by the Alamogordo group.
Bellefontaine. The Bellefontaine system, located in central Ohio,
serves five franchises from a single headend and microwave receive site. One
of the system's five franchises is scheduled for renewal by the end of 1998.
As of December 31, 1997, the Bellefontaine system passed 11,279 homes and
served 7,513 subscribers, representing approximately 9.7% of the total
subscribers in the Company's systems. Basic penetration in the Bellefontaine
system was approximately 66.6% as of such date. The Bellefontaine system
operates at 330 MHz, has a channel capacity of 43 and currently uses 43
channels. The Company intends to rebuild this group in 1999 to 450 MHz.
The communities served by this system include Bellefontaine,
Huntsville, Russells Point, Zanesfield, Indian Lake and Lakeview, Ohio.
Bellefontaine is located 50 miles northeast of Dayton and 50 miles northwest
of Columbus. Tourism is a major industry in Bellefontaine. In addition, the
Company believes that the local economy is influenced by the corporate
developments of Honda of America and Bellemar Parts Industries, which have
operations in the area.
Chadron Group. The Chadron group is comprised of five systems in
Nebraska serving the communities of Chadron, Crawford, Hemingford, Rushville
and Gordon. This group has five headends serving five franchises, the
earliest of which is scheduled to expire in 1999. As of December 31, 1997,
the Chadron group passed 5,634 homes and served 3,980 subscribers,
representing approximately 5.1% of the total subscribers in the Company's
systems. Basic penetration in the Chadron group was approximately 70.6% as of
such date. Each of the Chadron, Crawford, Gordon and Rushville systems
operates at 330 MHz, is capable of carrying 42 channels, and currently uses
41, 27, 37 and 37 channels, respectively. The Hemingford system is operating
at 450 MHz, has a channel capacity of 62 channels and currently uses 27
channels. The Company intends to upgrade the Rushville and Gordon portions of
the system in 1999 to 450 MHz.
The Company believes that the economy in the Chadron community is
influenced by the operations of Chadron State College. The number of subscribers
tend to decline in the summer months and then increase in September
6
<PAGE>
when classes resume.
Cortez. The Cortez system, located in Colorado, is a 330 MHz system
capable of carrying, and currently uses, 42 channels. This system operates
from a single headend serving one franchise area, which franchise expires in
2001. As of December 31, 1997, the Cortez system passed 2,910 homes and
served 2,084 subscribers, representing approximately 2.7% of the total
subscribers in the Company's systems. Basic penetration in the Cortez group
was approximately 71.6% as of such date. The Company intends to upgrade this
system in 1998 to 450 MHz.
Dickinson. The Dickinson system is a 330 MHz system, located in
North Dakota, which operates from a single headend serving one franchise
area, which franchise is scheduled to expire in 1999. The Dickinson system is
situated 100 miles west of Bismark, North Dakota on Interstate 94. As of
December 31, 1997, the Dickinson system passed 6,734 homes and served 5,276
subscribers, representing approximately 6.8% of the total subscribers in the
Company's systems. Basic penetration in the Dickinson system was
approximately 78.3% as of such date. The Dickinson system has a channel
capacity of 42 and is currently using 41 channels. The Dickinson system is
scheduled to be upgraded to 450 MHz in 1999.
Marksville Group. The Marksville group is comprised of four systems
in Louisiana serving the communities of Marksville, Jena, LaSalle and
Winnsboro and two systems in Arkansas serving the communities of Crossett and
Fordyce. This group has six headends and serves a total of 13 franchises, one
of which expires August 1998, and the remainder of which expire after the
year 2000. As of December 31, 1997, the Marksville group passed 17,285 homes
and served 12,207 subscribers, representing approximately 15.7% of the total
subscribers in the Company's systems. Basic penetration in the Marksville
group was approximately 70.6% as of such date. The Marksville, Crossett and
Fordyce systems are 330 MHz systems, are capable of carrying 42 channels and
currently use 42, 39, and 41 channels, respectively. The Winnsboro system is
a 300 MHz system capable of carrying 37 channels and currently uses 36
channels. Each of the Jena and LaSalle systems is a 550 MHz system capable of
carrying 78 channels and currently uses 39 channels. The system serving the
City of Crossett is the largest in the Marksville group. The Company intends
to upgrade the Crossett and Marksville systems to 450 MHz in 1998. The
Winnsboro system is scheduled to be rebuilt in 1999 to 550 MHz.
Suburban Houston. The suburban Houston group is comprised of four
systems in Texas serving portions of Montgomery County, Clay Road, Ranch
Country and Manvel, all outside the City of Houston. This group is the
Company's largest. It has four headends which serve a total of four
franchises, one of which expires in February 1999. As of December 31, 1997,
the suburban Houston group passed 31,755 homes and served 16,232 subscribers,
representing approximately 20.8% of the total subscribers in the Company's
systems. Basic penetration in the suburban Houston group was approximately
51.1% as of such date. The Montgomery County system is the largest of the
group, and is capable of carrying and currently uses 58 channels. This system
was upgraded to 420 MHz in 1997. The Company intends to rebuild this system
to 750 MHz in 1999. The Clay Road and Manvel systems are 450 MHz systems with
a channel capacity of 62 and currently use 61 and 51 channels respectively.
The Ranch Country system is a 330 MHz system capable of carrying 42 channels
and currently uses 37.
7
<PAGE>
Among the Company's nine operating groups, the suburban Houston group
has experienced the most significant growth over the past several years.
Radford. The Radford system, located in Virginia, serves three
franchises from a single headend and a microwave receive site. The earliest
franchise in this system is scheduled to expire in 2009. As of December 31,
1997, the Radford system passed 15,938 homes and served 12,464 subscribers,
representing approximately 16.0% of the total subscribers in the Company's
systems. Basic penetration in the Radford group was approximately 78.2% as of
such date. The Radford system is a 450 MHZ system capable of carrying 62
channels and currently uses 56 channels.
The communities served by this system include Radford, Pulaski
County and Christiansburg. The Company believes that the economy in Radford
is influenced by the operations of Radford University. Cable subscribers tend
to decline in the summer months and then increase in September when classes
resume. The communities served by this system are located in the western
portion of Virginia about 40 miles south of Roanoke.
Tahoe. The Tahoe system is a 330 MHz system that has a channel
capacity of 42 and currently uses 42 channels. This system is located south
of Lake Tahoe, California and operates from a single headend serving one
franchise area, which is scheduled to expire in 2001. As of December 31,
1997, the Tahoe system passed 5,036 homes and served 4,212 subscribers,
representing approximately 5.4% of the total subscribers in the Company's
systems. Basic penetration in the Tahoe system was approximately 83.6% as of
such date. The Company intends to upgrade the Tahoe system in 2000 to 450 MHz.
The community served by the Tahoe system benefits from the tourism
generated by Lake Tahoe. Most of the population in this region is employed in
jobs within the service, retail and hospitality sectors.
Non-Urban Markets
The Company believes that non-urban cable television systems generally
involve less economic risk than systems in large urban markets. Cable television
service is often necessary in non-urban markets to receive a wide variety of
television signals (including local broadcast stations). In addition, these
markets typically offer fewer competing entertainment alternatives than large
urban markets. As a result, non-urban cable television systems usually have a
higher basic penetration rate (i.e., the number of homes subscribing to basic
cable service as a percentage of homes passed by cable) and a more stable
customer base with less "churning" (i.e., customer turnover) than systems in
large urban markets. In addition, non-urban systems generally do not carry as
many off-air television broadcast signals and, as a result, such systems are not
required to have the channel capacity that may be required of large urban
systems. The Company believes that non-urban systems also have lower labor,
marketing and system construction costs and higher and more predictable
operating cash flow margins than urban systems.
Subscriber Rates and Services
The Company's revenues are derived principally from monthly
subscription fees for basic, satellite and premium services and one-time
installation fees
8
<PAGE>
for new subscribers. Subscribers are free to terminate services at any time
without additional charge, but are charged a reconnection fee to resume service.
The Company's systems currently offer customers various levels of cable services
consisting of a combination of broadcast television signals and satellite
television signals. For an extra monthly charge, the Company's systems also
offer "premium" television services to their customers. These services (such as
Home Box Office(R), Cinemax(R), Showtime(R) and The Movie Channel(R)) are
satellite-delivered channels that consist principally of feature films, live
sporting events, concerts and other special entertainment features, presented
without commercial interruption. The service options offered by the Company vary
from system to system, depending upon a system's channel capacity and viewer
interests. Rates for services also vary from market to market and according to
the type of services selected. Substantially all of the Company's systems
currently offer a "broadcast basic" package, one satellite service tier and
several premium services. Subscribers may choose various combinations of such
services.
System Rebuilds and Upgrades
The Company is continually engaged in the rebuilding and upgrading of
its systems to increase channel capacity. The Company's rebuilding and upgrading
programs over the last several years have consisted primarily of replacing low
channel capacity cable plant with new higher channel capacity trunk and feeder
lines and adding headend electronics to utilize increased channel capacity. For
the years ended December 31, 1995, 1996 and 1997, capital expenditures by the
Company for system rebuilds or upgrades totaled approximately $899,000,
$1,882,000, and $2,122,000, respectively. In addition, the Company anticipates
that over the next four years it will spend approximately $9.9 million to
upgrade and rebuild its systems and approximately $3.9 million for additional
plant construction (enabling it to pass approximately 12,800 additional homes).
The Company anticipates it will spend approximately $1.0 million and $5.2
million for upgrades and rebuilds and $.8 million and $.9 million for plant
construction during 1998 and 1999, respectively. (These amounts are included in
the figures set forth immediately above.) The Company's policy has been to
utilize fiber optic technology in its rebuild projects, when it is appropriate.
The Company believes that the addition of fiber optics in plant construction
will extend system reach, improve picture quality, allow for increased channel
capacity and improve system reliability.
The Company has been closely monitoring developments in the area of
digital compression, a technology that is expected to enable cable operators to
increase the channel capacity of cable television systems by permitting a
significantly increased number of video signals to fit in a cable television
system's existing band-width. Digital compression technology is still considered
to be developmental and to date has not been widely used by cable system
operators. The Company has no current plans to use digital compression
technology and there can be no assurance that any such use would result in a
cost-effective means of increasing channel capacity or increasing the revenues
of the Company.
Ancillary Services
The Company expects to realize growth from pay-per-view services,
advertising revenues and revenues from its affiliation with home shopping
9
<PAGE>
services. Pay-per-view programming, which generally consists of recently
released movies and special events (such as boxing, wrestling matches and other
sporting events and concerts), offers subscribers an opportunity to view movies
or such events individually. The Company expects that pay-per-view revenues will
increase over time as desirable sporting events become more consistently
available and as system upgrades allow the Company to make pay-per-view movies
available in more systems.
The Company, through independent contractors, sells available
advertising spots on advertiser-supported programming and offers home shopping
services to its subscribers. The home shopping services usually pay the Company
a share of revenues from sales of products in a system's service area.
Marketing
The Company markets its cable television services through radio, cable
television, direct mail and newspaper advertising, reinforced by door-to-door
solicitation and telemarketing. In addition to marketing efforts to attract new
customers, the Company frequently conducts campaigns to encourage existing
customers to purchase higher service levels. The Company also implements, from
time to time, promotions, office sale campaigns and new extension home marketing
to increase subscriber growth. The Company employs a marketing director who
supervises its marketing efforts. The Company's marketing activities are
conducted through its employees and independent contractors.
Decentralized Management
The Company operates its systems from nine operating groups or systems
to maximize operating effectiveness and to minimize supervisory costs. Each area
is managed by a group or system manager who has broad operating authority within
the limits of annual operating plans and capital budgets. Purchasing and, in
certain instances, hiring and training are performed at the regional level. The
Company believes that its decentralized management structure promotes operating
efficiency, employee motivation and responsiveness to the communities it serves.
The group or system managers generally have familiarity with local
markets, historical relationships with the Company and significant experience in
the cable television industry. The Company believes that this is an important
component in the delivery of customer service and maintenance of strong
relations with local authorities in franchise areas.
The Company has a regional office in Bedford, Texas principally for its
operational, engineering and administrative activities. J. Paul Morbeck, the
Company's Senior Vice President - Operations, is responsible for the day-to-day
supervision of the group or system managers.
Customer Service and Community Relations
The Company places a strong emphasis on customer service and community
relations and believes that success in these areas is critical to its business.
The Company has established and believes it maintains good relationships with
its governmental franchise authorities and plans to continue these relationships
through periodic contacts with the respective franchise officials
10
<PAGE>
concerning the Company's progress to date and future plans. There can be no
assurance, however, that the Company will maintain good relations with its
governmental franchise authorities.
Programming
The Company has various contracts to obtain basic, satellite and
premium programming for its systems from program suppliers with compensation
generally being based on a fixed fee per customer or a percentage of the gross
receipts for the particular service. Some program suppliers provide volume
discount pricing structures and/or offer marketing support to the Company. The
Company's programming contracts with such suppliers are generally for fixed
periods of time ranging from one to ten years and are subject to negotiated
renewal. The Company also arranges for some of its programming through American
Cable Entertainment Programming Company, Inc. ("AmPro"). Bruce A. Armstrong, the
Company's President and Chief Executive Officer, is the sole stockholder of
AmPro. The Company does not pay any compensation to AmPro in connection with
this arrangement. See "Item 13. Certain Relationships and Related Transactions."
The Company's cable programming costs have increased significantly in
recent years. The Company participates with the National Cable Television
Cooperative in order to purchase some of its programming at lower rates than may
be otherwise available to the Company. No assurances can be given that the
Company's programming costs will not increase substantially in the near future
or that other materially adverse terms will not be added to the Company's
programming arrangements.
Franchises
Cable television systems generally operate under non-exclusive
franchises granted by local governmental authorities. These franchises typically
contain many conditions such as time limitations on commencement and completion
of construction; conditions of service including the minimum number of channels;
types of programming and provisions for free service to schools and certain
other public institutions; and the maintenance of insurance and indemnity bonds.
Certain provisions of local franchises are subject to federal regulation.
As of April 10, 1998, the Company held 40 franchises. These franchises,
all of which are non-exclusive, generally provide for the payment of fees to the
issuing authority based on system revenues. Annual franchise fees for the
Company's systems range from less than 1% to 5% of the gross revenues generated.
For the years ended December 31, 1995, 1996 and 1997 franchise fees incurred by
the Company as a percentage of total system revenues were approximately 2.6%,
2.6% and 2.5% respectively. With limited exceptions, franchise fees are passed
directly through to the customers on their monthly bills. General business or
utility taxes may also be imposed on the Company's systems in various
jurisdictions. Federal regulations prohibit franchising authorities from
imposing franchise fees in excess of 5% of gross revenues and also permit the
cable operator to seek renegotiation and modification of franchise requirements
if warranted by "changed circumstances". Most of the Company's franchises can be
terminated prior to their stated expiration date for uncured breaches of
material provisions. As of April 10, 1998, the Company
11
<PAGE>
has never had a franchise revoked, and the Company has been able to obtain the
renewal or extension of all of its franchises on satisfactory terms as they
expired.
The Cable Communications Policy Act of 1984 (the "1984 Cable Act")
provides for, among other things, an orderly franchise renewal process whereby
the renewal of a franchise license issued by a governmental authority may not be
unreasonably withheld. The law also requires that incumbent franchisees' renewal
applications must be assessed on their own merits and not as part of a
comparative process with competing applications. If renewal is withheld or a
franchise is revoked, and the franchise authority chooses to acquire the system,
Federal law provides minimum standards for compensation to the system owner.
Competition
The Company's systems compete with other communications and
entertainment media, including conventional off-air television broadcasting
service. Cable television service was first offered as a means of improving
television reception in markets where terrain factors or remoteness from major
cities limited the availability of off-air television. In some of the areas
served by the Company's systems, a substantial variety of broadcast television
programming can be received off-air. The extent to which cable television
service is competitive with broadcast stations depends in significant part upon
the cable television system's ability to provide an even greater variety of
programming than that available off-air. Cable television systems also are
susceptible to competition from other video programming delivery systems, from
other forms of home entertainment such as video cassette recorders, and, in
varying degrees, from sources of entertainment in the community, including
motion picture theaters, live theater and sporting events.
Cable television systems may compete with wireless program distribution
services such as multi-channel, multipoint distribution service ("MMDS"). MMDS
uses low power microwave frequencies to transmit television programming over the
air to subscribers. MMDS facilities are licensed by the FCC and provide video
services on a subscription basis to households equipped with special receiving
equipment. The ability of MMDS to compete with cable television systems has been
limited in the past by the limited amount of analog channel capacity and other
technical issues. The Company currently competes with MMDS systems in portions
of its suburban Houston, Bellefontaine, Dickinson and Marksville groups.
Additional competition exists from private cable television systems serving
condominiums, apartment complexes and other private residential developments.
The operators of these private systems, known as Master Antenna Television and
Satellite Master Antenna Television ("SMATV"), often enter into exclusive
agreements with apartment building owners or homeowners' associations that
preclude operators of franchised cable television systems from serving residents
of such private complexes. The Company currently competes with SMATV systems in
its suburban Houston group.
In recent years, the FCC has adopted policies for authorizing new
technologies and providing a more favorable operating environment for certain
existing technologies. Such policies have the potential to create substantial
additional competition to cable television systems. These technologies include,
among others, direct broadcast satellite to home services ("DBS") whereby high
12
<PAGE>
frequency signals are transmitted by satellite to receiving facilities located
on the premises of the subscribers. DBS providers have achieved significant
growth over the past several years. The magnitude of competition from these
various sources and its effect on the Company's business cannot be predicted
with any certainty.
The 1992 Cable Act requires cable programmers under certain
circumstances to offer their programming to operators of DBS, MMDS and other
multi-channel video systems at not unreasonably discriminatory prices. Advances
in communications technology and changes in the marketplace are constantly
occurring. Therefore, it is not possible to predict the effect that ongoing
future developments might have on the Company's systems.
Since the Company's systems operate under non-exclusive franchises,
other operators (including municipal franchising authorities themselves), may
obtain permission to build cable television systems in competition with the
Company's systems in areas in which they presently operate. In the past five
years, less than 1% of the existing mileage in the Company's franchise areas
have been overbuilt. Although the Company is unaware of any pending applications
for franchises which would result in overbuilding in communities currently
served by its systems, there can be no assurance that overbuilds in such
communities will not occur. The Company is unable to predict the extent to which
it would be adversely affected as a result of overbuilds.
The 1996 Telecom Act allows local telephone and electric companies to
provide video services competitive with services provided by cable systems.
These competitors may increase the number of cable overbuilds. In addition,
these and other entities may rely on local MMDS service to deliver multichannel
competition.
Governmental Regulations
The cable television industry is subject to extensive governmental
regulations at the federal, state and local levels. The following is a summary
of federal laws and regulations affecting the operation of the cable television
industry and a description of certain state and local laws. This summary does
not purport to describe all present, proposed, or possible laws and regulations
affecting the industry. Future legislative and regulatory changes could
adversely affect the Company's operations. Moreover, Congress and the FCC have
frequently revisited the subject of cable regulation.
Cable Rate Regulation. In October 1992, Congress enacted the 1992 Cable
Act. The 1992 Cable Act subjected all cable television systems to extensive rate
regulation, unless they face "effective competition" in their local franchise
area. Federal law defines "effective competition" on a community-specific basis
as requiring either low penetration by the incumbent cable operator, appreciable
penetration by competing multichannel video providers ("MVPs") or the presence
of a competing MVP affiliated with a local telephone company.
Although the FCC rules control, local government units (commonly
referred to as local franchising authorities or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable the
basic service tier, which typically contains local broadcast stations and
public, educational
13
<PAGE>
and government access channels. Before an LFA begins basic service rate
regulation, it must certify to the FCC that it will follow applicable federal
rules, and many LFAs have voluntarily declined to exercise this authority. LFAs
also have primary responsibility for regulating cable equipment rates. Under
federal law, charges for various types of cable equipment must be unbundled from
each other and from monthly charges for programming services.
The FCC itself directly administers rate regulation of any cable
programming service tiers, which typically contain satellite-delivered
programming. Under the 1996 Telecom Act, the FCC can regulate satellite tier
service rates only if an LFA first receives at least two complaints from local
subscribers within 90 days of a satellite tier service rate increase and then
files a formal complaint with the FCC. When new satellite tier service rate
complaints are filed, the FCC now considers only whether the incremental
increase is justified and will not reduce the previously established satellite
tier service rate.
Under the FCC's rate regulations promulgated in connection with the
1992 Cable Act, most cable systems were required to reduce their non-premium
rates in 1993 and 1994, and since have had their rate increases governed by a
complicated price cap scheme that allows for the recovery of inflation and
certain increased costs, as well as providing some incentive for expanding
channel carriage. The FCC has modified its rate adjustment regulations to allow
for annual rate increases and to minimize previous problems associated with
regulatory lag. Operators also have the opportunity of bypassing this
"benchmark" scheme in favor of traditional cost-of-service regulation in cases
where the latter methodology appears favorable. Premium cable services offered
on a per-channel or per-program basis remain unregulated, as do affirmatively
marketed packages consisting entirely of new programming product. Federal law
requires basic service to be offered to all cable subscribers, but limits the
ability of operators to require the purchase of any satellite tier service
before purchasing premium services offered on a per-channel or per-program
basis.
The 1995 Small Systems Order. In June 1995, the FCC issued an order
(the "Small Systems Order") adopting new rules that reduce the regulatory
burdens of the 1992 Cable Act on small cable systems owned by multiple system
operators serving fewer than 400,000 subscribers. Under the Small Systems Order,
systems with fewer than 15,000 subscribers owned by an operator with fewer than
400,000 subscribers have a simplified cost-of-service showing, whereby basic and
satellite tier service rates averaging less than $1.24 per channel are presumed
reasonable. The Company serves fewer than 400,000 subscribers and, therefore,
qualifies for favorable rate treatment under the new FCC rules. Under the Small
Systems Order, the regulatory benefits accruing to small cable systems remain
effective even if such systems are later acquired by a multiple system operator
which serves in excess of 400,000 subscribers.
The 1996 Telecom Act. The 1996 Telecom Act provides additional relief
for small cable operators. For franchising units with less than 50,000
subscribers and owned by an operator with less than one percent of the nation's
cable subscribers (i.e., approximately 600,000 subscribers), satellite tier rate
regulation is automatically eliminated. The Company's systems qualify for the
favorable rate treatment afforded small cable operators. The 1996 Telecom Act
sunsets FCC regulation of satellite tier rates for all systems (regardless
14
<PAGE>
of size) on March 31, 1999. It also relaxes existing uniform rate requirements
by specifying that uniform rate requirements do not apply where the operator
faces "effective competition," and by exempting bulk discounts to multiple
dwelling units, although complaints about predatory pricing still may be made to
the FCC.
Cable Entry Into Telecommunications. The 1996 Telecom Act provides that
no state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded cable operators under federal law
can be gradually increased by utility companies owning the poles (beginning in
2001) if the operator provides telecommunications service, as well as cable
service, over its plant.
Telephone Company Entry Into Cable Television. The 1996 Telecom Act
allows telephone companies to compete directly with cable operators by repealing
the historic telephone company/cable cross-ownership ban. This will allow local
exchange carriers ("LECs") to compete with cable operators both inside and
outside their telephone service areas. Certain LECs have begun offering cable
services.
Under the 1996 Telecom Act, an LEC providing video programming to
subscribers will be regulated as a traditional cable operator (subject to local
franchising and federal regulatory requirements), unless the LEC elects to
provide its programming via an "open video system" ("OVS"). To qualify for OVS
status, the LEC must reserve two-thirds of the system's activated channels for
unaffiliated entities.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10%) of co-located cable systems, cable
operator buyouts of co-located LEC systems, and joint ventures between cable
operators and LECs in the same market. The 1996 Telecom Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecom Act also provides the FCC with
the limited authority to grant waivers of the buyout prohibition (subject to LFA
approval).
Electric Utility Entry Into Telecommunications/Cable Television. The
1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Additional Ownership Restrictions. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership (including broadcast
15
<PAGE>
network/cable restrictions), but leaves in place existing FCC regulations
prohibiting local cross-ownership between television stations and cable systems.
The 1996 Telecom Act also eliminates the three-year holding period required
under the 1992 Cable Act's "anti-trafficking" provision. The 1996 Telecom Act
leaves in place existing restrictions on cable cross-ownership with SMATV and
MMDS facilities, but lifts those restrictions where the cable operator is
subject to "effective competition." In January 1995, however, the FCC adopted
regulations which permit cable operators to own and operate SMATV systems within
their franchise area, provided that such operation is consistent with local
cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a
cable system from devoting more than 40% of its activated channel capacity to
the carriage of affiliated national program services. A companion rule
establishing a nationwide ownership cap on any cable operator equal to 30% of
all domestic cable subscribers has been stayed pending further judicial review.
Must Carry/Retransmission Consent. The 1992 Cable Act contains
broadcast signal carriage requirements that allow local commercial television
broadcast stations to elect once every three years to require a cable system to
carry the station ("must carry") or to negotiate for payments for granting
permission to the cable operator to carry the station ("retransmission
consent"). Less popular stations typically elect "must carry," and more popular
stations typically elect "retransmission consent." Must carry requests can
dilute the appeal of a cable system's programming offerings, and retransmission
consent demands may include substantial payments or other concessions. Either
option has a potentially adverse affect on the Company's business. Additionally,
cable systems are required to obtain retransmission consent for all "distant"
commercial television stations (except for commercial satellite-delivered
independent "superstations" such as WGN).
Access Channels. LFAs can include franchise provisions requiring cable
operators to set aside certain channels for public, educational and government
access programming. Federal law also requires cable systems to designate a
portion of their channel capacity (up to 15% in some cases) for commercial
leased access by unaffiliated third parties. The FCC has adopted rules
regulating the terms, conditions and maximum rates a cable operator may charge
for use of this designated channel capacity, but use of commercial leased access
channels has been relatively limited. The FCC released rules in February 1997
mandating a modest rate reduction. This sparked some increased interest in
commercial leased access, but did not make it substantially more attractive to
third party programmers. Certain of those programmers have now appealed the
revised rules to the D.C. Court of Appeals. Should the Court and the FCC
ultimately determine that an additional reduction in access rates is required,
cable operators could lose some control over its channel line-up, and the
quality of that line-up may decline.
Access to Programming. The 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers, and precludes video
programmers affiliated with cable companies from favoring cable operators over
competitors and requires such programmers to sell their programming to other
multichannel video distributors. This provision limits the ability of vertically
integrated cable programmers to offer exclusive programming arrangements to
cable companies.
16
<PAGE>
Other FCC or FAA Regulations. In addition to the FCC regulations noted
above, there are other FCC and Federal Aviation Authority (the "FAA")
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program nonduplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, ability to block selected programming,
antenna structure notification, tower marking and lighting, consumer protection
and customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
used in connection with cable operations.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a portion of their revenues
to a federal copyright royalty pool, cable operators can obtain blanket
permission to retransmit copyrighted material on broadcast signals. In addition,
the cable industry pays music licensing fees to Broadcast Music, Inc. and is
operating under an interim arrangement with American Society of Composers,
Authors and Publishers while rates are negotiated. Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
State and Local Regulations. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity in order to cross public rights-of-way. Federal
law now prohibits franchise authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee fails to
comply with material provisions.
The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable operations, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulations of a character similar to that of a
public utility. Although LFAs have considerable discretion in establishing
franchise terms, there are certain federal limitations.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
17
<PAGE>
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. See "Franchises."
Employees
At December 31, 1997, the Company had 122 employees, of which 117 were
full-time salaried or hourly employees and 5 were part-time employees. None of
the Company's employees is represented by a labor union or covered by a
collective bargaining agreement. The Company believes it has good relations with
its employees. See "Item 10. Directors and Executive Officers-General- Manager."
18
<PAGE>
ITEM 2. PROPERTIES.
A cable television system consists of four principal operating
components. The first component, the headend, receives television, radio,
satellite and other signals by means of special antennas. The second component,
the distribution network (which originates at the headend and extends throughout
the system's service area) consists of microwave relays, coaxial or fiber optic
cables placed on utility poles or buried underground and associated electronic
and passive equipment. The third component, the "drop", extends from the
distribution network to each customer's home and connects the distribution
system to the customer's television set. The fourth component of the system is
the converter, a device that changes the frequency of the television signals
carried on the system to frequencies that a customer's television can receive.
The Company has made available converters that can be "addressed" by sending
coded signals from the headend through the system to the addressable converter.
Addressable converters enable the system operator to change the customer's level
of service without visiting the customer's home. Addressable converters improve
system programming flexibility and operating procedures, allow system operators
to change the level of service to a customer on short notice and enable
customers to select pay-per-view programming events.
The Company's principal physical assets consist of cable television
systems, including signal receiving, encoding, decoding and processing
equipment, distribution systems, customer drops and converters for its cable
television systems. The signal receiving equipment typically includes a tower,
antennas for the reception of off-air television signals and earth stations for
the reception of satellite delivered programming. Headends, consisting of
antennas and associated electronic equipment, are necessary for the processing,
amplification and modulation of signals and are located near the receiving
equipment. The Company's distribution systems typically consist of coaxial and
fiber optic cables, passives and related electronic equipment. Customer
equipment typically consists of the customer drop and converter. The physical
components of the systems require maintenance and periodic replacement or
upgrading for technological advances. The Company believes all of its principal
physical assets are in reasonably good condition for their age and location.
The Company's cables generally are attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The FCC regulates
most pole attachment rates under the Federal Pole Attachment Act. See "Item 1.
Business-Governmental Regulations."
The Company owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices. As of April 10, 1998, the Company owned four parcels of real estate and
leased 38 parcels for various uses. The Company believes that its properties,
both owned and leased, are in good condition and are suitable and adequate for
the Company's business operations in the foreseeable future. Substantially all
of the Company's assets, including its real property, are subject to liens to
secure the payment of Company obligations with respect to outstanding
indebtedness. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
In February 1996, the Company, together with other corporations who
held the then issued and outstanding capital stock of the Company (the
"Holding Companies" and together with the Company, the "Debtors"), filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. On December 6,
1996, the Bankruptcy Court confirmed the Debtors' Second Amended and Restated
Joint Plan of Reorganization dated October 31, 1996, as modified. The Court
required the Company to put $387,000 in escrow pending the resolution of a
claim by certain of the Company's former Senior Secured Noteholders. The
claim included interest computed at the difference between the non-default
rate of interest, and the default rate for the period the Company was in
bankruptcy on the then outstanding Senior Secured Notes. The Company filed
its objection to the claim on March 18, 1997. On March 17, 1998 the Court
ruled in favor of the former Senior Secured Noteholders. As a result of such
ruling the Company will release a portion of the cash in escrow to those
former Noteholders. Such amounts were substantially accrued during 1996. In
addition, the Company has filed objections to certain other proofs of claim
filed by its former creditors. The Company believes that the aggregate amount
in dispute with respect to such claims will not have a material adverse
effect on its financial condition. See "Item 1. Business -Bankruptcy
Proceedings."
Other than as described above and ordinary and routine litigation
incidental to its business operations, the Company is not involved in any
pending legal proceedings.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the Company's shareholders
during the fiscal quarter ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is shown in "Item 10. Directors
and Executive Officers of the Registrant", and is incorporated herein by
reference.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
No Public Market; No Outstanding Convertible Securities
The Company's Common Stock is not traded on any established public
trading market. In addition, none of the Company's currently issued and
outstanding shares of Common Stock is subject to outstanding options or warrants
to purchase, or securities convertible or exchangeable into Common Stock, except
as described herein. Each share of Class C Common Stock will automatically
convert into one share of Class A Common Stock upon the earlier of December 31,
1999 or a "transaction event". A "transaction event" generally includes any
merger, consolidation, liquidation, reorganization or dissolution of the
Company, any sale of all of the Company's systems or any similar transaction
such as a reclassification of the capital stock of the Company or the dividend
or other distribution of any corporate assets to the Company's stockholders.
Shares Eligible For Future Sale
All of the Company's outstanding shares of Class B and Class C Common
Stock were issued in December 1996 in reliance upon Section 1145(a) of the
Bankruptcy Code and such shares are considered to be sold in a public offering
pursuant to Section 1145(c). Accordingly, none of the Company's 24,000 shares of
Class B Common Stock or 75,000 shares of Class C Common Stock constitute
"restricted securities" as defined in Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"), and such shares are freely salable under the
Securities Act, unless the holders thereof are considered to be "underwriters."
All of the 1,000 shares of Class A Common Stock are "restricted securities"
within the meaning of Rule 144 since such shares were issued and sold by the
Company in a private transaction in reliance upon an exemption from registration
under the Securities Act and may be sold only if they are registered under the
Securities Act or unless an exemption from registration, such as the exemption
provided by Rule 144 under the Securities Act, is available.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least a one-year period (as computed
under Rule 144) is entitled to sell within any three-month period a number of
such shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock and (ii) the average weekly trading volume in the
Company's Common Stock during the four calendar weeks immediately preceding such
sale. Sales under Rule 144 are also subject to certain provisions relating to
the manner and notice of sale and the availability of current public information
about the Company. A person (or persons whose shares are aggregated) who is not
deemed an affiliate of the Company at any time during the 90 days immediately
preceding a sale, and who has beneficially owned restricted shares for at least
a two-year period (as computed under Rule 144), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitation and other
conditions described above.
22
<PAGE>
Notwithstanding the foregoing, there are significant prohibitions
and/or restrictions on the sale of shares of Common Stock. Pursuant to a pledge
agreement, dated as of December 18, 1996, by and among all of the record holders
of the Company's issued and outstanding shares of Common Stock and Finova
Capital Corporation ("Finova"), individually and as agent for the Lenders under
the Loan Agreement, as amended by the amended and restated pledge agreement, all
of such shares have been pledged to the Lenders as collateral for the Company's
obligations under the Loan Agreement. In addition, the Plan provides that,
except as provided in the Management Agreement, the Class A Common Stock may not
be transferred until the Class C Common Stock has automatically converted into
Class A Common Stock. The Plan also provides that the beneficial ownership of
the Class C Common Stock may be transferred only with the proportional share of
the Senior PIK Notes issued to the holders thereof. The Company has also agreed
not to register any shares of Class C Common Stock under the Securities Act for
sale by security holders prior to the conversion to Class A Common Stock.
Given the complex and subjective nature of the question of whether a
particular holder may be an "underwriter", the Company recommends that potential
sellers and/or purchasers of the Common Stock consult with counsel concerning,
among other things, whether they may freely sell such Common Stock without
registration under the Securities Act.
Holders
As of April 10, 1998, there was one record holder of the Class A Common
Stock, six record holders Class B Common Stock and one record holder of Class C
Common Stock. State Street Bank and Trust Company, as the Depository under the
Deposit Agreement, holds the Class C Common Stock on behalf of the holders of
the Senior PIK Notes. See "Item 12. Security Ownership of Certain Beneficial
Owners and Management."
Dividends
The Company has not declared or paid any cash dividends on its Common
Stock at any time and does not anticipate doing so in the foreseeable future.
Under Texas law, the Company may not declare dividends on its common stock if,
after giving effect to the dividend, the Company would be rendered insolvent or
the "distribution" of such dividend exceeds the surplus of the Company. In
addition, the Loan Agreement and the Senior and Junior Indentures prohibit the
Company from paying any dividends. The Company's Articles of Incorporation
provide that the declaration of any dividend must be approved by the vote of
four of the five directors of the Company present at any meeting at which there
is a quorum.
The Company intends to retain any future earnings to repay indebtedness
or finance the growth and development of its business. Any determination as to
the payment of dividends will be at the discretion of the Board of Directors and
will depend on, among other things, the prohibitions and provisions described
above, the Company's operating results, financial condition, capital
requirements, contractual provisions which restrict or prohibit the declaration
of dividends and such other factors as the Board of Directors may deem relevant.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 are derived from the
consolidated financial statements of the Company. The Company's consolidated
balance sheet data as of December 31, 1997, 1996, 1995, 1994, and 1993 and the
consolidated statements of operations data for each of the five years ended
December 31, 1997, are derived from the audited consolidated financial
statements of the Company, including the Company's consolidated financial
statements which appear elsewhere in this Form 10-K. The Company's consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles. The selected financial data set forth below should be
read in conjunction with the other financial information included elsewhere in
this Form 10-K, including "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto of the Company.
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ...................... $ 32,287 $ 29,775 $ 28,088 $ 29,585 $ 34,077
-------- -------- -------- -------- --------
Total operating, selling,
general and administrative
expenses (1).............. 16,714 18,649 14,355 15,002 16,962
Depreciation and amortization 8,662 7,711 9,246 9,860 10,472
Other operating costs ........ 1,453 1,339 1,264 1,439 1,403
-------- -------- -------- -------- --------
Operating income ............. 5,458 2,076 3,223 3,284 5,240
Interest expense, net ........ (20,573) (7,789) (16,838) (17,641) (18,665)
Gain (loss) on sale of
systems and marketable
securities ................ -- 3 5,700 15,853 (37)
Income tax benefit(expense) .. 10,332 1,032 (764) (436) 629
Other expense, net(2) ........ -- -- -- -- (120)
-------- -------- -------- -------- --------
Net income (loss) ............ $ (4,783) $ (4,678) $ (8,679) $ 1,060 $(12,953)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets ................. $ 59,608 $ 47,393 $ 52,498 $ 67,643 $ 81,257
Long-term debt ............... 164,429 151,919 150,656 159,322 173,476
Shareholders' deficiency ..... (117,178) (112,395) (107,717) (99,039) (100,099)
</TABLE>
(1) Includes Reorganization Items, consisting of expenses and other costs,
related to the reorganization of the Company of an immaterial amount in
1997, $3,673 in 1996, and an immaterial amount in 1995.
(2) Other expense, net in 1993 is comprised of extraordinary gain on
extinguishment of debt of $455 and cumulative effect of changes in
accounting principles of $(575).
See Note 3 of the consolidated financial statements regarding
disposition of properties in 1995 and the effect of such disposition on
the comparability of the historical financial statements of the
Company.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has received an unsolidited offer from a third party to buy
substantially all of its assets for cash, and is in the process of
negotiating a definitive asset purchase agreement. There can be no assurance
that the parties will enter into an agreement or, if such agreement is
entered into, that the transaction will be consummated. The anticipated sale
proceeds from any such transaction would not be adequate to pay all of the
Company's indebtedness in full.
Background. In January 1988, Simmons Communications Merger Corp. merged
with and into the Company pursuant to a merger agreement whereby each share of
common stock of the Company was converted into the right to receive $27.25 in
cash or approximately $129.3 million in the aggregate. As a result of the
Merger, the Company became highly-leveraged.
In October 1992, the 1992 Cable Act was enacted and the FCC imposed
extensive regulations on the rates charged by cable television owners and
operators. Beginning in 1993, the Company's revenue and cash flow were adversely
impacted by these regulations as the Company was required to reduce many of its
service rates effective September 1993 and again in August 1994.
In 1993, the Company extended the maturity date of its senior
indebtedness to November 1995 and in conjunction with such extension, agreed to
make principal payments of $15 million in January 1994 and $18 million in March
1995. As part of the Company's efforts to satisfy these mandatory payment
obligations and provide additional working capital, Scott sold cable systems
located in Rancho Cucamonga, California in January 1994 for $23.6 million and
Missouri, Oklahoma, Kansas and northern Texas for $12.4 million in February
1995.
In October 1995, the Company failed to make an interest payment on its
outstanding subordinated debentures and in November 1995, the Company's senior
secured debt aggregating approximately $34.4 million matured and the Company
failed to pay such debt on maturity. The Company entered into 90-day standstill
agreements with holders of its senior bank loans and notes and holders of its
senior subordinated notes in order to seek refinancing alternatives; however,
the Company was unable to refinance its obligations or negotiate a restructuring
on favorable terms prior to the expiration of the agreements.
In February 1996, the Company filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. Subsequently, the Company sought new
financing to replace approximately $62.3 million of debt which had matured and
negotiated new terms for approximately $88.4 million of subordinated and junior
subordinated debt, including the deferral of cash interest payments for several
years. In December 1996, the Bankruptcy Court confirmed the Plan of
Reorganization and it became effective on December 18, 1996 concurrently with
the Company's consummation of a new senior, secured credit facility which
provided for up to $67.5 million in loans and the issuance of Senior and Junior
PIK Notes (as defined below) in the aggregate principal amount of $88.4 million.
See "Liquidity and Capital Resources."
Revenues. The Company's revenues are derived principally from monthly
subscription fees for basic, satellite and premium services. The Company's
systems currently offer customers various levels of cable services consisting of
a combination of broadcast television signals and satellite television signals.
For an extra monthly charge, the Company's systems also offer "premium"
television services to their customers. These services (such as Home
25
<PAGE>
Box Office-Registered Trademark-, Cinemax-Registered Trademark-,
Showtime-Registered Trademark- and The Movie Channel-Registered Trademark-)
are satellite-delivered channels that consist principally of feature films,
live sporting events, concerts and other special entertainment features,
presented without commercial interruption. The service options offered by the
Company vary from system to system, depending upon a system's channel
capacity and viewer interests. Rates for services also vary from market to
market and according to the type of services selected. Substantially all of
the Company's systems currently offer a "broadcast basic" package, one or
more satellite service tiers and several premium services. Subscribers may
choose various combinations of such services.
For the years ended December 31, 1997, 1996 and 1995, the Company
derived approximately $25.3 million, $23.2 million and $22.0 million,
respectively, from basic cable service and approximately $2.9 million, $2.8
million and $2.8 million, respectively, from premium cable service.
Operating Expenses. Operating expenses are principally comprised of
expenses associated with technical personnel and the costs of programming
services. Generally, increases are based on inflation, change in plant miles and
system configuration, increases in the number of subscribers, additions to the
number of channels offered to subscribers and increases in subscriber revenue.
Historically, basic programming expenses have risen faster than inflation and
this trend is expected to continue.
General and Administrative Expenses. General and administrative
expenses are principally comprised of expenses associated with the system
offices and related personnel, which generally increase annually based on
inflation and subscriber levels. General and administrative expenses also
contain costs associated with billing services which are expected to increase as
certain systems upgrade their billing systems as needed.
Marketing Expenses. Over the past three years, the Company has
maintained marketing expenses at low and relatively consistent levels. This is
primarily due to the fact that the Company's non-urban and rural markets require
cable for basic television reception.
Historical Net Losses. The Company has incurred net losses in four of
the five years ended December 31, 1997. The principal items contributing to
these net losses are the high levels of interest expense (due to the Company's
highly-leveraged financial condition), depreciation of fixed assets and
amortization of intangibles in those periods. The Company believes that
recurring net losses are not uncommon for cable television companies and expects
that such losses will continue. However, the Company believes that future cash
flow from operations and its existing debt facilities will provide sufficient
working capital for operations for the next several years. See "Liquidity and
Capital Resources."
Business Strategy. The Company believes that non-urban cable television
systems generally involve less economic risk than systems in large urban
markets. Cable television service is often necessary in non-urban markets to
receive a wide variety of television signals (including local broadcast
stations). In addition, these markets typically offer fewer competing
entertainment alternatives than large urban markets. As a result, non-urban
cable television systems usually have a higher basic penetration rate (i.e.,
26
<PAGE>
the number of homes subscribing to basic cable service as a percentage of homes
passed by cable) and a more stable customer base with less "churning" (i.e.,
customer turnover) than systems in large urban markets. Non-urban systems
generally do not carry as many off-air television broadcast signals and, as a
result, such systems are not required to have the channel capacity that may be
required of large urban systems. The Company believes that non-urban systems
also have lower labor, marketing and system construction costs and higher and
more predictable operating cash flow margins than large urban markets.
In June 1995, the FCC extended relief from the rate regulatory
provisions of the 1992 Cable Act to small cable operators such as the Company,
thereby enabling greater flexibility in establishing service rates. In February
1996, Congress enacted the 1996 Telecom Act which, among other things,
deregulated all levels of service, except broadcast basic service, to small
cable operators such as the Company. The Company believes that it has the
opportunity to increase system cash flow as a result of continued subscriber
growth, the recently adopted Small Systems Order and the 1996 Telecom Act. As
noted above, this federal legislation significantly reduced the impact of rate
regulation on the Company by eliminating certain regulatory burdens imposed by
the 1992 Cable Act. As part of its plan to increase system cash flow, Scott has
implemented a targeted capital spending program to rebuild and upgrade the
suburban Houston group, Alamogordo, Radford and several smaller systems over the
next several years.
During the five years ended December 31, 1997, the number of
subscribers of cable television systems currently owned by the Company increased
(from 1993 to 1997) by 1,634, 2,945, 1,988, 1,362 and 1,907, respectively. On an
actual basis, including the effect of systems sold in 1994 and 1995, the net
increase (decrease) in subscribers during the five years ended December 31, 1997
were 2,048, (7,917), (7,616), 1,362 and 1,907, respectively.
Other. In connection with the Plan of Reorganization, the Company
incurred approximately $3.7 million of reorganization expenses for the year
ended December 31, 1996, and an immaterial amount in 1997 and 1995.
Results of Operations
Year Ended December 31, 1997 compared with December 31, 1996
Revenues. Revenues for the year ended December 31, 1997
increased approximately 8.4% to $32.3 million from $29.8 million in the previous
year. This increase was attributable primarily to higher revenue per average
subscriber ($35.19 during 1997 compared with $33.02 during 1996, an increase of
6.6%). Average subscribers during 1997 were 76,454 compared with 75,137 during
1996.
Basic revenues increased by $2.1 million or 9.1% from $23.2
million to $25.3 million, $1.7 million of which was achieved through a higher
basic revenue per average subscriber and $400,000 of which was achieved through
a higher level of average equivalent basic subscribers. Revenue from pay
television for the 1997 period increased by $100,000 or 3.6% due principally to
a higher average revenue per pay unit. Other revenue increased by $300,000 or
8.6% largely due to increases in pay per view revenues and advertising sales.
27
<PAGE>
Total Operating, Selling, General and Administrative Expenses.
Total operating, selling, general and administrative expenses for the year ended
December 31, 1997 decreased by 10.4% to $16.7 million from $18.6 million for the
prior year. This was largely due to a decrease in reorganization expenses of
approximately $3.5 million offset by increases described below.
Operating, selling, general and administrative expenses,
excluding reorganization expenses, increased 10.5% or approximately $1.6
million. Approximately $1.0 million of the increase was attributable to higher
programming costs. These increases were due to routine increases in rates
charged by the programmers, an increase in the number of average subscribers,
and the addition of channels to the basic and satellite tier packages offered to
subscribers. Bad debt expense increased approximately $200,000 over prior year,
representing an increase from 1.0% of revenues in 1996 to 1.6% in 1997.
Subscriber billing costs increased approximately $100,000 over 1996 due to the
use of more sophisticated billing systems, and to the increase in the average
number of subscribers. All other expenses increased approximately $300,000, or
3.8%, principally due to inflation.
Depreciation and Amortization. Depreciation and amortization
for the year ended December 31, 1997 increased by 12.3% to $8.7 million from
$7.7 million in the prior year. This increase was principally attributable to
depreciation of capital expenditures and the amortization of deferred financing
costs.
Interest Expense (Net). Interest expense net of interest
income for the year ended December 31, 1997 increased by 164% to $20.6 million
from $7.8 million in the prior year. This increase was primarily attributable to
the cessation of the incurrence of interest on the Company's unsecured debt
during much of 1996 as a result of the Company's bankruptcy proceedings.
Income Tax. Income tax benefit increased by $9.3 million
over 1996. This is primarily attributable to the recognition of deferred tax
assets related to net operating loss carryforwards. These assets were
previously offset by a valuation allowance. An offer to purchase the
Company's assets makes the utilization of such assets more likely than not,
resulting in the elimination of the valuation allowance. See "Item 1.
Business-Recent Development", and Notes 6 and 11 in the Notes to Consolidated
Financial Statements to "Item 8. Financial Statements and Supplementary Data".
Net Loss. Net loss for the year ended December 31, 1997 was
$4.8 million compared to $4.7 million for the prior year. The largest components
of this change were a decrease in reorganization expenses of approximately $3.4
million, an increase in tax benefit of approximately $9.3 million, and an
offsetting increase in interest expense of approximately $12.8 million.
Year Ended December 31, 1996 compared with December 31, 1995
Revenues. Revenues for the year ended December 31, 1996 increased
approximately 6.0% to $29.8 million from $28.1 million in the previous year.
This increase was attributable primarily to higher revenue per average
subscriber ($33.02 during 1996 compared with $31.27 during 1995, an increase of
5.6%), as the effect of gains in subscriber levels of systems currently owned
28
<PAGE>
was largely offset by the effects of the sale, in February 1995, of several
systems serving approximately 9,500 equivalent basic subscribers as of such
date. Average subscribers during 1996 were 75,137 compared with 74,681 during
1995.
Basic revenues for systems currently owned increased by $1.7 million or
8.0%, $1.2 million of which was achieved through a higher basic revenue per
average subscriber and $500,000 of which was achieved through a higher level of
average equivalent basic subscribers. Revenue from pay television for the 1996
period increased by $60,000 or 2.2% due principally to a higher average revenue
per pay unit. Other revenue increased by $360,000 or 10.7% largely due to higher
revenue from pay per view services and higher franchise fees charged to
subscribers.
Total Operating, Selling, General and Administrative Expenses. Total
operating, selling, general and administrative expenses, increased by $4.3
million. $3.4 million of this increase is attributable to reorganization
expenses. Total operating, selling, general and administrative expenses
excluding reorganization expenses, increased by 6.3% to $15.0 million from $14.1
million for the prior year. Amounts included in such prior year expenses related
to systems sold in 1995 were $200,000. For systems currently owned, costs and
expenses increased by $1.1 million in 1996 as compared to 1995. Approximately
57% of this increase was attributable to higher programming costs for basic
service for the year ended December 31, 1996 which increased by 15.0% per
average subscriber.
For systems currently owned, personnel related costs which comprised
26.4% of operating, general and administrative expenses for the year ended
December 31, 1996, accounted for an additional 13% of the increase, as they
increased by 3.8% principally due to inflationary increases. General
inflationary increases and higher costs related to a 3% higher average level of
basic subscribers caused the remaining 40% of the increased expenses.
Depreciation and Amortization. Depreciation and amortization for the
year ended December 31, 1996 decreased by 16.3% to $7.7 million from $9.2
million in the prior year. This decrease was principally attributable to the
absence of amortization of deferred financing costs since they became fully
amortized in 1995.
Interest Expense (Net). Interest expense net of interest income for the
year ended December 31, 1996 decreased by 53.6% to $7.8 million from $16.8
million in the prior year. This decrease was primarily attributable to the fact
that the Company did not incur approximately $9.8 million of interest on its
unsecured debt while it was in bankruptcy.
Net Loss. Net loss for the year ended December 31, 1996 was $4.6
million compared to $8.7 million for the prior year. This change was the result
of the absence of a $5.7 million gain from asset sales which occurred in 1995,
an increase in reorganization items of $3.4 million as well as the factors
described above.
Liquidity and Capital Resources
The Company has been highly leveraged since the Merger in 1988. In
29
<PAGE>
addition, governmental regulations such as the 1992 Cable Act have adversely
affected the Company's cash flow and its ability to service its debt. In
February 1996, the Company filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in order to refinance a portion of its senior debt
which had matured and restructure a portion of its debt. The Company emerged
from bankruptcy in December 1996. The following discussion includes a brief
description of arrangements concerning the Company's material outstanding
indebtedness.
Loan Agreement. In December 1996, the Company entered into a loan
agreement with Finova Capital Corporation (the "Loan Agreement") for a senior,
secured credit facility in the aggregate amount of $67.5 million. The credit
facility includes a $57.5 million term loan and up to $10.0 million in revolving
loans. The loans are secured by, among other things, a lien on substantially all
of the Company's real and personal property and a pledge by the Company's
stockholders of all of the issued and outstanding shares of common stock of the
Company. The proceeds of the initial loans ($63.0 million) were used to
refinance existing indebtedness pursuant to the terms and provisions of the Plan
of Reorganization and the revolving loans will be used to provide the Company
with additional working capital.
The term loan matures on January 2, 2002. The principal balance of the
term loan is payable in quarterly principal installments commencing in January
1998 with an aggregate of $1,050,000 payable in 1998, $1,550,000 due in 1999,
$2,200,000 due in 2000 and $2,600,000 due in 2001. In addition, under the Loan
Agreement, the Company is required to use 75% of its annual "excess cash flow,"
as defined in the Loan Agreement, to reduce the principal outstanding under the
term loan, beginning with excess cash flow for the year ended December 31, 1997.
The revolving loans also mature on January 2, 2002. Unused portions of the
revolving loans may be borrowed and reborrowed at the Company's discretion
subject to the applicable commitment and borrowing base limitations.
The outstanding term and revolving loans currently bear interest at
1.5% per annum above the Citibank, N.A. corporate base rate. The margin above
the corporate base rate is subject to change in the event the Company does not
meet a fixed ratio of outstanding loans to operating cash flow, which is
measured each quarter. As of April 10, 1998, the Company had $57.0 million
outstanding pursuant to the term loan and $3.0 million outstanding pursuant to
revolving loans (with $7.0 million in availability through revolving loans). At
April 10, 1998, outstanding term and revolving loans under the Loan Agreement
bore interest at the rate of 10.0% per annum.
Subject to certain exceptions, the Loan Agreement prohibits or
restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes (including mergers,
acquisitions and sales of assets), dividends, the making of specified
investments and certain transactions with affiliates. In addition, the Loan
Agreement contains financial covenants which prohibit the Company from making
capital expenditures in excess of $5.6 million in 1997, $4.6 million in 1998,
$8.3 million in 1999, $7.3 million in 2000 and $2.7 million in 2001. The Loan
Agreement limits the ratio of senior debt to cash flow (as defined therein) to
5.0 to 1 through June, 1997, which ratio is reduced to 4.25 to 1 at September
30, 1999 and thereafter. The Loan Agreement also requires a (i) ratio of cash
flow to fixed charges to be no less than 1.1 to 1 through 1998 and 1.05 to 1
thereafter and
30
<PAGE>
(ii) a ratio of cash flow to debt service to be no less than 1.85 to 1 except
for the four quarters ended September 30, 1999, during which period it must be
no less than 1.8 times. At December 31, 1997, the Company was in compliance
with these ratios and covenants.
Senior PIK Notes. On December 18, 1996, the Company executed an
indenture with Fleet National Bank, as Trustee (the "Senior Indenture"),
pursuant to which the Company issued an aggregate of $49,500,000 in 15%
Senior Subordinated Pay-in-Kind Notes due March 18, 2002 (the "Senior PIK
Notes"). The Senior PIK Notes have been issued to a depository on behalf of
the holders of certain claims under the Plan of Reorganization. The Senior
PIK Notes are secured by, among other things, a lien on substantially all of
the Company's real and personal property which liens are subordinate to the
liens created under the Loan Agreement. Interest accrues on the outstanding
balance of the Senior PIK Notes at 15% per annum, however, interest will be
paid through the issuance of additional notes by the Company. The principal
amount and all accrued interest with respect to the Senior PIK Notes will be
due and payable on March 18, 2002.
Subject to certain exceptions, the Senior Indenture prohibits or
restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes (including mergers,
acquisitions and sales of assets), dividends, the making of specified
investments and certain transactions with affiliates. The Senior Indenture
does not require the Company to maintain any financial ratios.
Junior PIK Notes. On December 18, 1996, the Company executed an
indenture with Fleet National Bank, as Trustee (the "Junior Indenture"),
pursuant to which the Company issued an aggregate of $38,925,797 in 16%
Junior Subordinated Pay-in-Kind Notes due July 18, 2002 (the "Junior PIK
Notes"). The Junior PIK Notes have been issued directly to the appropriate
class of claimants under the Plan. The Junior PIK Notes are secured by, among
other things, a lien on substantially all of the Company's real and personal
property which liens are subordinate to the liens created under the Loan
Agreement and the Senior Indenture. Interest accrues on the outstanding
balance of the Junior PIK Notes at 16% per annum, however, interest will be
paid through the issuance of additional notes by the Company. The principal
amount and all accrued interest with respect to the Junior PIK Notes will be
due and payable on July 18, 2002.
Subject to certain exceptions, the Junior Indenture prohibits or
restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes (including mergers,
acquisitions and sales of assets), dividends, the making of specified
investments and certain transactions with affiliates. The Junior Indenture
does not require the Company to maintain any financial ratios.
System Upgrades and Rebuilds. The Company's rebuilding and upgrading
programs over the last several years have consisted primarily of replacing
low channel capacity cable plant with new higher channel capacity trunk and
feeder
31
<PAGE>
lines and adding headend electronics to utilize increased channel capacity.
For the years ended December 31, 1995, 1996, and 1997, capital expenditures
by the Company for system rebuilds or upgrades totaled approximately
$899,000, $1,882,000, and $2,122,000 respectively. In addition, the Company
anticipates that over the next four years it will spend approximately $9.9
million to upgrade and rebuild its systems and approximately $3.9 million for
additional plant construction (enabling it to pass approximately 12,800
additional homes). The Company anticipates it will spend approximately $1.0
million and $5.2 million for upgrades and rebuilds and $.8 million and $.9
million for plant construction during 1998 and 1999, respectively. (These
amounts are included in the figures set forth immediately above.) The
Company's policy has been to utilize fiber optic technology in its rebuild
projects, when it is appropriate. The Company believes that the addition of
fiber optics in plant construction will extend system reach, improve picture
quality, allow for increased channel capacity and improve system reliability.
The cable television business requires substantial financing for
construction, maintenance and expansion of cable plant. The Company has
historically financed its capital needs through long-term debt and, to a
lesser extent, through cash provided from operating activities.
Based on the Company's current plan of operations, it is anticipated
that the Company's projected cash flow from operations and current debt
facilities will provide sufficient working capital for operations, debt
service requirements and planned capital expenditures for the next several
years. However, there can be no assurance that the Company will not require
additional financing prior to that time. The Company's capital requirements
depend on, among other things, whether the Company is successful in
generating increased revenues and cash flow, governmental regulations
affecting the cable television industry generally and the Company's systems
in particular, the ability of the Company to successfully renew its franchise
agreements and competing technological and market developments. See "Item 1.
Business."
Inflation
Certain of the Company's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing are
affected by general inflationary factors. However, the Company does not
believe that its financial results have been, or will be, materially
adversely affected by inflation. The effect of future inflationary pressures
on the Company's business will depend on the Company's ability to, among
other things, successfully increase rates as it deems appropriate. See "Item
1. Business."
Impact of the Year 2000 Issue
An issue exists for all companies that rely on computers as the year
2000 approaches. The "Year 2000" problem is the result of past practices in
the computer industry of using two digits rather than four to identify the
applicable year. This practice will result in incorrect results when
computers perform arithmetic operations, comparisons or data field sorting
involving years later than 1999. The Company relies entirely on the use of
third party software or service providers using such software. The Company
has had discussions with these vendors, and has received assurances that any
such
32
<PAGE>
problems are being addressed, and will be resolved before the issue begins to
cause any incorrect results. Costs to the Company to resolve any Year 2000
problems are not expected to be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Scott Cable Communications, Inc. and Subsidiaries - Index to Consolidated
Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ............................................... 35
Consolidated Balance Sheets-December 31, 1997 and 1996 ..................... 36
Consolidated Statements of Operations-For the Years Ended December 31, 1997,
1996 and 1995............................................................. 37
Consolidated Statements of Cash Flows-For the Years Ended December 31, 1997,
1996 and 1995............................................................. 38
Consolidated Statements of Shareholders' Deficiency-For the Years Ended
December 31, 1997, 1996 and 1995.......................................... 39
Notes to Consolidated Financial Statements ................................. 40
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
Scott Cable Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Scott Cable
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of operations,
shareholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Scott Cable Communications, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Notes 1 and 4 to the consolidated financial statements, on
December 6, 1996 the United States Bankruptcy Court for the District of
Delaware entered an order confirming the Company's Second Amended Joint Plan
of Reorganization (the "Plan") which became effective on December 18, 1996.
Under the Plan, the Company is required to comply with certain terms and
conditions as more fully described in Notes 1 and 4.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the consolidated financial statements, the Company has received an unsolicited
offer from a third party to buy substantially all of its assets for cash, and
is in the process of negotiating a definitive asset purchse agreement. There
can be no assurance that the parties will enter into an agreement or, if such
agreement is entered into, that the transaction will be consummated. The
anticipated sale proceeds from any such transaction would not be adequate
to pay all of the Company's indebtedness in full. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this potential sale.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 2, 1998, except for Note 11, as to which the date is March 17, 1998
35
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
INVESTMENT IN CABLE TELEVISION SYSTEMS:
Land and land improvements $28,508 $18,523
Vehicles 1,652,141 1,400,872
Buildings and improvements 127,326 127,326
Office furniture and equipment 450,732 388,513
CATV distribution systems and related equipment 38,307,414 39,415,762
----------- -----------
Total property, plant and equipment 40,566,121 41,350,996
Less accumulated depreciation (23,084,031) (24,402,301)
----------- -----------
Total property, plant and equipment - net 17,482,090 16,948,695
FRANCHISE COSTS - net 504,042 3,997,320
GOODWILL - net 19,207,528 19,877,946
DEFERRED FINANCING COSTS - net 2,204,128 2,760,110
DEFERRED INCOME TAXES 16,529,105 961,846
CASH AND CASH EQUIVALENTS 2,821,365 838,232
ACCOUNTS RECEIVABLE less allowance for doubtful accounts of
$152,301 in 1997 and $105,881 in 1996 379,073 483,319
PREPAID AND OTHER ASSETS 480,414 1,525,334
----------- -----------
TOTAL ASSETS $59,607,745 $47,392,802
----------- -----------
----------- -----------
LIABILITIES AND
SHAREHOLDERS' DEFICIENCY
LIABILITIES:
Notes and loans payable $164,428,668 $151,918,827
Accounts payable and accrued expenses 6,334,770 7,087,654
Unearned income 183,879 172,903
Deferred income taxes 5,838,148 608,443
----------- -----------
Total liabilities 176,785,465 159,787,827
----------- -----------
COMMITMENTS AND CONTINGENCIES (See Note 8)
SHAREHOLDERS' DEFICIENCY:
Common stock 10,000 10,000
Additional paid- in- capital 4,229,850 4,229,850
Accumulated deficit (121,417,570) (116,634,875)
----------- -----------
Total shareholders' deficiency (117,177,720) (112,395,025)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $59,607,745 $47,392,802
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenue $32,287,116 $29,775,231 $28,087,568
----------- ----------- -----------
Costs and expenses:
Operating expenses 11,135,299 10,085,733 9,441,480
Selling, general and administrative
expenses 5,578,879 8,562,964 4,912,893
Management fees 1,452,920 1,339,885 1,263,941
Depreciation and amortization 8,661,646 7,710,772 9,245,698
----------- ----------- -----------
Total costs and expenses 26,828,744 27,699,354 24,864,012
----------- ----------- -----------
Operating income 5,458,372 2,075,877 3,223,556
Interest expense, net of interest income
of $97,757 in 1997, $453,491 in 1996 (20,573,419) (7,788,496) (16,838,286)
and $441,517 in 1995
Gain on sale of cable television
systems and other assets 2,675 5,699,717
----------- ----------- -----------
Loss before income taxes (15,115,047) (5,709,944) (7,915,013)
Income tax benefit (expense) 10,332,352 1,032,374 (763,806)
----------- ----------- -----------
Net loss $(4,782,695) $(4,677,570) $(8,678,819)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,782,695) $(4,677,570) $(8,678,819)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 3,941,968 3,527,272 3,467,748
Amortization 4,719,678 4,183,500 5,777,950
Accretion of notes and loans payable 14,259,841 1,141,663 6,348,835
Deferred Federal and state income taxes (10,337,554) (1,040,374) 681,739
Gain on sale of cable television system
and other assets (2,675) (5,699,717)
Changes in assets and liabilities:
Increase (decrease) in unearned income 10,976 (7,877) (2,203)
Decrease(increase) in accounts receivable 104,246 (31,271) (220,267)
Decrease in prepaid and other assets 1,044,920 2,556,405 1,711,329
(Decrease)increase in accounts payable
and accrued expenses (752,884) (1,603,630) 2,458,108
--------- --------- ---------
Net cash provided by operating activities 8,208,496 4,045,443 5,844,703
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,508,880) (4,919,216) (2,309,803)
Net proceeds from sale of cable television
system and other assets 33,517 38,463 12,420,629
--------- --------- ----------
Net cash (used in) provided by investing activities (4,475,363) (4,880,753) 10,110,826
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on senior bank credit facility (1,750,000) (8,328,221) (4,015,917)
Payments on senior secured notes (23,110,767) (10,959,037)
Payments on senior subordinated notes (17,632,698)
Payments on zero coupon subordinated notes (13,307,604)
Payments on subordinated debentures (500,000)
Issuance of senior credit facility 63,000,000
Payments of deferred financing costs (2,779,912)
Other notes payable (38,958)
--------- --------- ----------
Net cash used in financing activities (1,750,000) (2,659,202) (15,013,912)
--------- --------- ----------
Net change in cash and cash equivalents 1,983,133 (3,494,512) 941,617
Cash and cash equivalents - Beginning of year 838,232 4,332,744 3,391,127
--------- --------- ----------
Cash and cash equivalents - End of year $2,821,365 $838,232 $4,332,744
--------- --------- ----------
--------- --------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $5,014,841 $10,285,074 $8,366,909
--------- --------- ----------
--------- --------- ----------
Cash paid during the year for income taxes $12,480 $15,328 $86,400
--------- --------- ----------
--------- --------- ----------
Reorganization items paid during the year
Legal fees $223,231 $2,419,930 $146,919
Financial advisory fees 427,813 1,835,216 100,000
Restructuring fee 500,000
Other 28,128 465,069 14,750
--------- --------- ----------
Total reorganization items paid $679,172 $5,220,215 $261,669
--------- --------- ----------
--------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------------
Number of shares
Issued and Outstanding Par Value
---------------------- ----------------------------- Total
Class Class Class Class Class Class Additional Accumulated Sharesholders'
Common A B C Common A B C Paid-In Capital Deficit Deficiency
(1) (2) (3) (4) (1) (2) (3) (4) --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 100 0 0 0 $1,000 $4,238,850 $(103,278,486) $(99.038.636)
Net loss (8,678,819) (8,678,819)
------ ------ ------ ------ ------ ---------- ------------- -------------
Balance at
December 31,1995 100 0 0 0 1,000 4,238,850 (111,957,305) (107,717,455)
Net loss (4,677,570) (4,677,570)
Recapitalization of
common stock (100) 1,000 24,000 75,000 (1,000) $100 $2,400 $7,500 (9,000)
------ ------ ------ ------ ------ ---- ------ ------ ---------- ------------- -------------
Balance at
December 31,1996 0 1,000 24,000 75,000 0 100 2,400 7,500 4,229,850 (116,634,875) (112,395,025)
Net loss (4,782,695) (4,782,695)
------ ------ ------ ------ ------ ---- ------ ------ ---------- ------------- -------------
Balance at
December 31,1997 0 1,000 24,000 75,000 $0 $100 $2,400 $7,500 $4,229,850 $(121,417,570) $(117,177,720)
------ ------ ------ ------ ------ ---- ------ ------ ---------- ------------- -------------
------ ------ ------ ------ ------ ---- ------ ------ ---------- ------------- -------------
</TABLE>
(1) Consists of 100 shares with no par value.
(2) 76,000 shares authorized, $0.10 par value
(3) 24,000 shares authorized, $0.10 par value
(4) 75,000 shares authorized, $0.10 par value
See notes to consolidated financial statements.
39
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. PETITION FOR REORGANIZATION UNDER CHAPTER 11
Petition for Reorganization Under Chapter 11 of the United States
Bankruptcy Code
On November 15, 1995, the Bank Loans and Senior Notes of Scott Cable
Communications, Inc., and Subsidiaries (the "Company") aggregating
approximately $34,440,000 matured. The Company had not been in
compliance with certain covenants in its debt agreements, including the
timely payment of principal and interest. Such lack of compliance and
failure to make payments on a timely basis afforded certain remedies to
the holders of the debt, including acceleration of the maturity of the
debt. The holders of the Bank Loans and Senior Notes (collectively the
"Senior Debt") entered into an agreement (the "Standstill Agreement")
with the Company whereby the Senior Debt holders agreed not to take any
action against the Company to collect the indebtedness until February
15, 1996. In exchange for this Standstill Agreement, the Company agreed
to repay $3,000,000 of principal outstanding on November 15, 1995 and
to pay all interest on the Senior Debt for the period from August 15,
1995 through February 15, 1996 in the aggregate amount of approximately
$1,808,000. In addition, the Company agreed to accrue an additional 2%
interest as a default rate for the period from November 15, 1995 to
February 15, 1996.
Also on November 15, 1995, the Company entered into a similar
Standstill Agreement with the holders of its Senior Subordinated Notes
which were to mature on January 15, 1996 in the amount of approximately
$17,630,000. The Senior Subordinated Notes Standstill Agreement was
effective through March 1, 1996. In exchange for this Standstill
Agreement, the Company agreed to pay all interest on the Senior
Subordinated Notes for the period from August 15, 1995 through February
15, 1996 in the aggregate amount of approximately $1,128,000. In
addition, the Company agreed to accrue an additional 2% interest as a
default rate for the period from January 15, 1996 to February 15, 1996.
On February 14, 1996, the Company and its parent corporations filed a
voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States
Bankruptcy Court for the District of Delaware (the "Court").
On March 7, 1996, the Court approved a Cash Collateral Stipulation
which provided for the Company's use of its cash collateral through
December 31, 1996, for expenditures including normal ongoing operating
expenses, necessary capital expenditures, management fees, and the
costs of the Chapter 11 case.
In consideration for the use of Cash Collateral, the Company granted
the Senior Debt holders and the Senior Subordinated Note holders a
replacement lien on all of the Company's property, assets, and rights
acquired after February 14, 1996. The Company agreed to pay interest
monthly in arrears in cash to the Senior Debt holders.
On December 6, 1996, the Court confirmed the Company's Second Amended
Joint Plan of Reorganization (the "Plan") as modified. On December 18,
1996, the Plan became effective as a result of, among other things: the
closing of a $67,500,000 credit facility (See Note 4) and payment in
full of the Senior Debt, Senior Subordinated Notes, and the Zero Coupon
Subordinated Notes. In addition, certain payments were made to the
Indenture Trustee on behalf of the holders of the Subordinated
Debentures. The Plan further called for the issuance of two new series
of
40
<PAGE>
subordinated secured payment-in-kind notes ("PIK") in replacement of
the Subordinated Debentures and the Junior Subordinated Debentures. The
Plan also called for payment in full of all allowed unsecured
pre-petition liabilities, cancellation of the existing common stock of
the Company, issuance of a new Class C common stock representing
seventy-five percent of the equity to the Subordinated Debenture
holders, issuance of new Class B common stock representing twenty-four
percent of the equity to the Junior Subordinated Debenture holders;
and, issuance of a new Class A common stock to Management representing
one percent of the equity (see Note 5).
Reorganization Items
Expenses related to the Chapter 11 proceedings are included in the line
item selling, general and administrative expenses in the Consolidated
Statements of Operations. Reorganization items were immaterial in 1997,
$3,673,041 in 1996 and immaterial in 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
Formation of Company
On January 20, 1988, Simmons Communications Merger Corp. ("Simmons")
merged with Scott Cable Communications, Inc. ("Old Scott") to form
Scott Cable Communications, Inc., the surviving corporation. Simmons
was formed for the purpose of acquiring and merging with Old Scott and
had no operations prior to the merger. Scott Cable Communications, Inc.
owns and operates cable television systems throughout the United
States.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
differ from those estimates.
Investment in Cable Television Systems
Reception and distribution facilities and equipment additions are
stated at cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets (four to twenty years).
The cost of connections for new cable television subscribers, including
materials, labor and overhead, are capitalized. Expenditures for
maintenance and repairs are charged to operating expense as incurred,
and betterments, replacement of equipment and additions are
capitalized.
Franchise acquisition costs are amortized over ten years using the
straight-line method. Ten years represents the approximate weighted
average life of the related franchises. Accumulated amortization of
franchise costs aggregated $34,775,026 at December 31, 1997 and
$31,281,748 at December 31, 1996.
Deferred financing costs are amortized over the term of the related
debt. Accumulated amortization of deferred financing costs aggregated
$575,784 at December 31, 1997 and $19,802 at December 31, 1996.
41
<PAGE>
Goodwill, the excess of purchase price over the value of net assets
acquired, is amortized over forty years. Accumulated amortization of
goodwill aggregated $7,661,538 at December 31, 1997 and $6,991,120 at
December 31, 1996.
Valuation of Long-Lived Assets
The Company periodically undertakes a review and valuation of the net
carrying value, recoverability and write-off of all categories of its
long-lived assets. The Company in its valuation considers current
market values of its properties, competition, prevailing economic
conditions, government policy including taxation, and the Company's and
the industry's historical and current growth patterns. This assessment
is based on estimated future cash flows compared with the assets'
carrying value. If impairment is indicated, a write-down to fair value
(normally measured by discounting estimated cash flows) would be taken.
Reclassifications
Certain 1996 and 1995 financial statement amounts have been
reclassified to conform with the current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and liquid investments with a
maturity of three months or less from the date of purchase.
Restricted Cash
The Court required the Company to put $387,000 in escrow pending the
resolution of a claim by certain of the Company's former Senior Secured
Noteholders. The claim included interest computed at the default rate
on the then outstanding Senior Secured Notes. The Company filed its
objection to the claim on March 18, 1997. This is included in the
Balance Sheet Caption "Prepaid and Other Assets". (See Note 11).
Approximately $100,000 of cash at December 31, 1997 and $500,000 at
December 31, 1996 was held in an escrow account to provide funds for
indemnification of the Company's Officers and Directors. This is
included in the Balance Sheet caption "Prepaid and Other Assets".
Income Taxes
The deferred tax provision is determined under the liability method.
Under this method, deferred tax assets and liabilities are recognized
based on differences between the financial statement carrying amount
and the tax basis of assets and liabilities based on presently enacted
tax rates.
Subscription Revenue
Revenue includes earned subscription revenue and charges for
installation. Charges for installations are recognized as revenue upon
completion of the connection. Subscription revenues received in advance
of services rendered are deferred and recorded as income in the period
in which the related services are provided.
42
<PAGE>
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base.
Disclosure of Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity
of these financial instruments. The carrying value of the Company's
Senior Credit Facility approximated its fair value at December 31, 1997
and 1996. At December 31, 1997 the fair value of the Company's Second
Secured PIK Notes and Third Secured PIK Notes, based on quoted market
prices, were as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
<S> <C> <C>
Second Secured PIK Notes $57,513,289 $51,232,500
Third Secured PIK Notes 45,665,379 8,953,000
</TABLE>
It is not practicable to estimate the fair value of the Second Secured
PIK Notes and Third Secured PIK Notes at December 31, 1996 as there was
no market for the Notes at that time.
Impact of New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". The Company will adopt this standard in 1998.
In addition, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS 131 requires disclosure
of certain information about operating segments and about products and
services, geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the
effect this new standard will have on disclosure in the Company's
financial statements and the required information will be reflected in
the year ended December 31, 1998 financial statements.
3. DISPOSITION
On February 17, 1995, the Company sold its cable television systems
located in Missouri, Oklahoma, Kansas, and northern Texas.
The sales proceeds of this transaction were $12,374,000 of which
$11,974,954 was used to make mandatory prepayments of debt. The net
carrying value of the assets at the date of sale were as follows:
<TABLE>
<CAPTION>
<S> <C>
Reception and distribution facilities and equipment $1,348,461
Franchise cost 1,066,589
Goodwill 4,244,189
</TABLE>
The net gain on the transaction was approximately $5,700,000.
43
<PAGE>
4. NOTES AND LOANS PAYABLE
Notes and loans payable at December 31, 1997 and 1996 are comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Senior Credit Facility (a) $ 61,250,000 $ 63,000,000
Second Secured PIK Notes (b) 57,513,289 49,768,125
Third Secured PIK Notes (c) 45,665,379 39,150,702
------------ ------------
Total Notes and Loans Payable $164,428,668 $151,918,827
------------ ------------
------------ ------------
</TABLE>
(a) The Senior Credit Facility is comprised of a $57,500,000 term loan
due in increasing quarterly installments beginning January, 1998 with a
final payment due on the maturity date (January 2, 2002), and a
$10,000,000 Revolving Facility due on the maturity date. Borrowings
under the Revolving Facility were $3,750,000 and $5,500,000 at December
31, 1997 and 1996, respectively. Initially, interest is charged at the
base rate plus 1.5%. The interest rate was 10% and 9.75% at December
31, 1997, and 1996, respectively. As the leverage decreases, the rate
is reduced by one-quarter of 1%.
(b) The Second Secured PIK Notes were issued in the amount of
$49,500,000 in exchange for the outstanding Subordinated Debentures on
December 18, 1996 (See Note 1). The Second Secured PIK Notes bear
interest semi-annually at the rate of 15% and are due on March 18,
2002. At maturity, the notes will have a fully accreted value of
$105,846,852.
(c) The Third Secured PIK Notes were issued in the amount of
$38,925,797 in exchange for the outstanding Junior Subordinated
Debentures on December 18, 1996 (See Note 1). The Third Secured PIK
Notes bear interest semi-annually at the rate of 16% and are due on
July 18, 2002. At maturity, the notes will have a fully accreted value
of $91,971,052.
The Senior Credit Facility is secured by a first lien on substantially
all of the Company's assets, including, but not limited to, all
tangible property and fixtures, all material leasehold interests, all
cash and all liquid investments, and the Company's stock. The Second
and Third PIK Notes are secured by second and third liens,
respectively, on the Company's assets. The Senior Credit Facility
requires the Company to maintain certain debt ratios and covenants.
At December 31, 1997, the Company was in compliance with these
ratios and covenants.
Debt Maturities
The following summarizes the maturities of amounts outstanding as of
December 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
1998 $ 1,050,000
1999 1,550,000
2000 2,200,000
2001 2,600,000
2002 251,667,904
---- -----------
Total 259,067,904
Less future accretion 94,639,236
------------
Total $164,428,668
------------
------------
</TABLE>
44
<PAGE>
5. COMMON SHAREHOLDERS' DEFICIENCY
Except for the election of Directors, each share of Class A Common
Stock has ten votes per share. The holders of Class A Common Stock,
voting as a separate class, are entitled to elect two of the Company's
five directors. No share of Class A Common Stock may be transferred
until all of the shares of Class C Common Stock have been converted
into shares of Class A Common Stock pursuant to the Company's Amended
and Restated Articles of Incorporation, except as otherwise provided in
the Management Agreement.
Except for the election of Directors, each share of Class B Common
Stock has ten votes per share. The holders of Class B Common Stock,
voting as a separate class, are entitled to elect one of the Company's
five directors.
Except for the election of Directors, each share of Class C Common
Stock has one vote per share. The holders of Class C Common Stock,
voting as a separate class, are entitled to elect two of the Company's
five directors. Each share of Class C Common Stock will automatically
convert into one share of Class A Common Stock upon the earlier of
December 31, 1999 or any merger, consolidation, liquidation,
reorganization or dissolution of the Company, any sale of all of the
Company's systems, or any similar transaction such as a
reclassification of the capital stock of the Company or the dividend or
other distribution of any corporate assets to the Company's
stockholders. The beneficial ownership of the Class C Common Stock is
transferable only with the proportional share of the Senior PIK Notes
issued to the holders under the Plan (see Note 1).
6. INCOME TAXES
The components of the net deferred income tax assets (liabilities) at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets ............. $ 16,529,105 $ 13,348,309
Deferred tax liabilities ........ (5,838,148) (7,976,859)
---------- ----------
Net deferred tax asset .......... 10,690,957 5,371,450
Less: valuation allowance ....... (5,018,047)
---------- ----------
Total net deferred income tax
asset ......................... $ 10,690,957 $ 353,403
---------- ----------
---------- ----------
</TABLE>
The net deferred income tax assets (liabilities) are reflected in the
consolidated balance sheets as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred income tax assets .......... $ 16,529,105 $ 961,846
Deferred income tax liabilities ..... (5,838,148) (608,443)
---------- --------
Total net deferred income
tax asset ......................... $ 10,690,957 $ 353,403
---------- --------
---------- --------
</TABLE>
Deferred tax assets relate primarily to net operating losses,
investment tax credits and Federal Alternative Minimum Tax credit
carryforwards. Deferred tax liabilities relate to temporary differences
between book and tax depreciation and amortization expenses, and
deferred gain on installment sales.
45
<PAGE>
The components of the deferred tax assets and deferred tax liabilities
at December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Net operating losses (Federal) $13,259,718 $ 9,761,142
Investment tax credits ....... 1,387,481 1,387,481
Minimum tax credits .......... 969,125 961,846
Other ........................ 912,781 1,237,840
----------- -----------
Total deferred tax assets ...... $16,529,105 $13,348,309
----------- -----------
----------- -----------
Deferred tax liabilities
Depreciation and amortization $ 2,505,176 $ 3,711,503
Installment sale ............. 3,137,672 3,137,672
Other ........................ 195,300 1,127,684
----------- -----------
Total deferred tax liabilities . $ 5,838,148 $ 7,976,859
----------- -----------
----------- -----------
</TABLE>
In 1997, the Company determined that it is more likely than not that
the entire deferred tax asset will be utilized, and that the valuation
allowance should therefore be eliminated. Previously, the valuation
allowance reduced the deferred tax asset. The elimination of the
valuation allowance is based, in part, on the pending sale
transaction reported in Note 11.
Income tax (benefit) expense consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ...................... -- -- $ 55,007
State and local ............... $ 5,201 $ 8,000 27,061
------------ ------------ ------------
5,201 8,000 82,068
Deferred:
Federal ....................... (9,149,497) (961,846) 938,220
State and local ............... (1,188,056) (78,528) (256,482)
------------ ------------ ------------
(10,337,553) (1,040,374) 681,738
------------ ------------ ------------
Total income tax (benefit) expense $(10,332,352) $ (1,032,374) $ 763,806
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has net operating loss carryforwards for income tax
purposes at December 31, 1997 of approximately $39,000,000 expiring in
years 2011 through 2017, a portion of which are subject to limitation
under Section 382 of the Internal Revenue Code. Additionally, the
Company anticipates the recognition (for tax purposes only) of a
deferred gain on an installment sale of approximately $9,300,000. The
Company also has investment tax credit carryforwards, after reductions
required by the Tax Reform Act of 1986, of approximately $1,387,000
expiring in years 1999 through 2003.
46
<PAGE>
The effective income tax rate differs from the statutory rate as a
result of the following: (000s)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed tax benefit at federal statutory rate
on loss before income taxes ............ $ (5,139) $ (1,941) $ (2,691)
Non-deductible bankruptcy cost ............... 370
State and local deferred income tax benefit
net of federal income taxes ............ (476) (46) (151)
Valuation allowance .......................... (4,860) 363 2,719
Amortization of goodwill ..................... 228 228 228
Gain on system sale .......................... 1,443
Other adjustments ............................ (85) (6) (784)
-------- -------- --------
$(10,332) $ (1,032) $ 764
-------- -------- --------
-------- -------- --------
</TABLE>
7. TRANSACTIONS WITH RELATED PARTIES
Scott Cable Management Company, Inc. ("Management") acts as manager for
the Company. The Company entered into a new management agreement with
Management which became effective January 1, 1997. Under the new
agreement, Management is to be paid a management fee equal to 4.25% of
total revenues, plus an additional 0.25% of revenues if certain
operating results are met (as defined in the management agreement). The
Company also reimburses Management for out-of-pocket expenses. The
management fee was $1,452,920, $1,339,885 and $1,263,941 for 1997, 1996
and 1995, respectively. Additionally, the Company reimbursed Management
for out-of-pocket expenses in the amount of $59,708, $58,936 and
$66,162 for 1997, 1996 and 1995, respectively.
8. COMMITMENTS AND CONTINGENCIES
Commitments
At December 31, 1997 future minimum lease payments, by year and in
aggregate, under noncancelable operating leases for equipment, office
space and tower site rental were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $146,141
1999 108,350
2000 79,937
2001 64,147
2002 59,547
Thereafter 136,527
--------
Minimum lease
payments $594,649
--------
--------
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$472,491, $475,227 and $472,452, respectively.
47
<PAGE>
Contingencies
The Company is involved in litigation and regulatory matters which
involve certain claims which arise in the normal course of business,
none of which, in the opinion of management, is expected to have a
materially adverse effect on the Company's financial position or
results of operations.
9. 401(K) RETIREMENT SAVINGS PLAN
The Company's employees are covered by a 401(k) retirement/savings plan
covering all employees who meet service requirements. Total plan
expenses for the years ended December 31, 1997, 1996 and 1995 were
$7,299, $8,522 and $7,482, respectively.
10. REGULATORY MATTERS
October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") which
regulates the cable television industry. Pursuant to the 1992 Cable
Act, the Federal Communications Commission (the "FCC") has issued
numerous regulations which include provisions regarding rates and other
matters. As a result of these regulations, the Company was required to
reduce many of its basic service rates effective September 1, 1993 and
again on August 1, 1994.
On June 5, 1995, the FCC extended regulatory rate relief to small cable
operators. All of the Company's cable systems qualified for this
regulatory relief, which allows for greater flexibility in establishing
rates (including increases). On February 8, 1996, Congress enacted the
1996 Telecommunications Act, which, among other things, immediately
deregulated all levels of service except broadcast basic service for
small cable operators for which all of the Company's cable systems
qualified. The Company does not believe there will be a material impact
as a result of this regulation.
11. SUBSEQUENT EVENTS
The Company has received an unsolicited offer from a third party to
buy substantially all of its assets for cash, and is in the process
of negotiating a definitive asset purchase agreement. There can be
no assurance that the parties will enter into an agreement or, if such
agreement is entered into, that the transaction will be consummated.
The anticipated sale proceeds from any such transaction would not be
adequate to pay all of the Company's indebtedness in full. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this potential sale.
On March 17, 1998 the Court ruled in favor of certain of the Company's
former Senior Secured Noteholders with respect to their claim for the
difference between interest computed at the non- default rate and
interest at the default rate for the period the Company was in
bankruptcy. As a result of such ruling the Company will release a
portion of the cash in escrow to those former Noteholders. Such amounts
were substantially accrued during 1996. (See Note 2).
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
independent public accountants during the last two fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
General
Manager. The Company and Scott Cable Management Company, Inc. (the
"Manager"),entered into a management agreement, dated December 18, 1996 (the
"Management Agreement"), pursuant to which the Manager acts as the manager,
supervisor and operator of the Company's cable television systems and directs
all actions concerning the operation and management of the systems other than
extraordinary decisions. The Company pays the Manager a monthly fee equal to
4.25% of its gross revenues, plus reimbursement of out-of-pocket expenses up to
a maximum of $300,000 per year, unless such additional expenses have been
otherwise approved. The Manager also may be entitled to receive an additional
management fee each year of 0.25% of the Company's gross revenues for that year
(the "Additional Management Fee"). Whether the Manager is entitled to receive
the Additional Management Fee is determined at the end of each year based upon
differences between actual and projected operating cash flow for that year. At
year end, if the Company's operating cash flow equals or exceeds 90% of
projected operating cash flow, the Additional Management Fee, plus accrued
interest, shall be paid to the Manager and if at year-end, the Company's
operating cash flow is less than 90% but equal to or greater than 80% of
projected cash flow, the Additional Management Fee will remain in escrow. To the
extent the Company's operating cash flow is less than 80% of projected operating
cash flow for any year, the Additional Management Fee is returned to the
Company. The Additional Management Fee is paid monthly by the Company into a
trust account and accrues interest until paid to the Manager or returned to the
Company in accordance with the terms of the Management Agreement. The management
fee paid to Manager for 1997 totaled $1,452,920, including the Additional
Management Fee.
The Management Agreement terminates on December 31, 1999, unless earlier
terminated in accordance with its terms. Under the Management Agreement, the
Company may terminate the agreement after the occurrence of an "event of
default" (as defined therein), which events include: (i) the acceleration of
indebtedness under the Loan Agreement; (ii) the breach of negative covenants in
the Management Agreement concerning competition and self-dealing by the Manager;
(iii) the loss or termination of a significant franchise; (iv) the gross
negligence or willful misconduct of the Manager to the extent it has or could
have a material adverse effect on the Company; (v) the loss of the services of
Mr. Armstrong as President and Chief Executive Officer of the Manager; and (vi)
the Company's failure to have operating cash flow in any year which exceeds 77
1/2% of projected operating cash flow for such year. In the event the Management
Agreement is terminated as a result of an "event of default" or a "transaction
event" does not occur prior to January 1, 2000, the
49
<PAGE>
Manager is required to deposit its shares of Class A Common Stock with a
depositary for no additional consideration. The Company believes these
provisions will provide an incentive to the Manager with respect to the
consummation of a "transaction event" prior to January 2000. In the event the
Management Agreement is terminated, the holders of depositary receipts
underlying the Class C Common Stock will be entitled to elect four directors.
For additional information concerning the definition of a "transaction event,"
see "Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters - No Public Market; No Outstanding Convertible Securities".
Bruce A. Armstrong, a member of the Company's Board of Directors and its
President and Chief Executive Officer, is the sole stockholder of the Manager.
The Manager has been managing the Company's systems for over ten years. All of
the Company's executive officers, other than Mr. J. Paul Morbeck, are employees
of an affiliate of the Manager. For additional information concerning certain
relationships between the Company and the Manager, see "Item 1. Business -
Bankruptcy Proceedings" "Item 12. Security Ownership of Certain Beneficial
Owners and Management", "Item 13. Certain Relationships and Related
Transactions".
The Manager is engaged in the management and operation of cable television
systems. In the past, an affiliate of the Manager has managed systems owned by
third parties at the time it acted as manager of the Company's systems and
although the Manager is not currently managing any other systems, it intends to
do so in the future. To the extent the Manager manages systems owned by others,
the personnel of the Manager who are executive officers of the Company may be
required to devote substantial time and effort on matters unrelated to the
Company which may result in potential conflicts in use and availability of time
and resources. The directors and executive officers of the Company are subject
to duties of loyalty and care under applicable law in connection with their
conduct with respect to the Company.
The Company does not believe that the Manager's other business activities
will have a material impact on the Company. The Management Agreement prohibits
the Manager and its affiliates from managing or owning a cable television system
in any area served by the Company's systems which would compete with the
Company's systems for subscribers, or from causing the Company to hire employees
of the Manager or its affiliates. See "Board of Directors."
Directors and Executive Officers. The following table sets forth certain
information concerning the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Positions with the Company
- ---- --- --------------------------
<S> <C> <C>
Bruce A. Armstrong ..... 50 President, Chief Executive Officer and Director
John M. Flanagan, Jr ... 55 Senior Vice President, Chief Financial Officer and Director
Day L. Patterson ....... 55 Senior Vice President, General Counsel and Secretary
Steven C. Fox .......... 47 Vice President-Finance, Treasurer and Assistant Secretary
Jerold S. Earl ......... 49 Vice President-Engineering
J. Paul Morbeck ........ 46 Senior Vice President-Operations
Richard H. Churchill, Jr 45 Director
Russell A. Belinsky .... 37 Director
50
<PAGE>
Jarlath A. Johnston .... 49 Director
</TABLE>
The business experience of each of the persons listed above for at least
the last five years is as follows:
Bruce A. Armstrong has been the Company's President since 1993 and Chief
Executive Officer since January 1994. From 1988 to 1993, Mr. Armstrong was the
Company's Executive Vice President. Mr. Armstrong has been engaged in the cable
industry for over 25 years and has had a broad range of management experience at
the system, regional and corporate levels. From 1984 to 1988, Mr. Armstrong held
various top management positions with Jones Intercable, Inc., including serving
as the President of Jones Spacelink, Ltd., a public company, from 1987 to 1988.
Prior to 1984, Mr. Armstrong was a general manager and a Vice President at
Teltron Cable TV. Mr. Armstrong began his career as a system manager for
Tele-Communications, Inc., after graduating college and serving in the Air
Force.
John M. Flanagan, Jr. has been a Senior Vice President and Chief Financial
Officer of the Company since 1993. From 1989 to 1992, he served as Vice
President of Finance and Treasurer of Metro Mobil CTS, Inc. From 1981 to 1989,
Mr. Flanagan was the Vice President-Finance and Chief Financial Officer of Essex
Communications Corp. and Affiliated Companies. Prior to 1981, Mr. Flanagan
served in various accounting and financial positions at Teleprompter Corporation
and prior to that was in public accounting with Deloitte Haskins and Sells. Mr.
Flanagan has over 19 years of experience in the cable television industry.
Day L. Patterson has been Senior Vice President, General Counsel and
Secretary of the Company since 1988. Prior to 1988, Mr. Patterson served as Vice
President and General Counsel of Group W Satellite Communications, and then as
Vice President and Chief Counsel at the cable division of Westinghouse
Broadcasting & Cable. Mr. Patterson first joined the cable industry in 1980 as
General Counsel of Cablevision Systems Corp. Mr. Patterson began his legal
career at a major law firm in New York City.
Steven C. Fox has been the Vice President-Finance, Treasurer and Assistant
Secretary since 1993. Since 1989, Mr. Fox has served as the Company's corporate
controller. Mr. Fox served as the Corporate Controller of Multivision Cable T.V.
Corp. from 1988 to 1989 and as Regional Controller for Rogers Cable Systems of
America, Inc. from 1985 to 1988. Mr. Fox began his career in the cable
television industry at Cablecom General, Inc. as Corporate Controller from 1974
to 1985, and General Manager of a subsidiary. Mr. Fox has over 23 years of
experience in the cable television industry.
Jerold S. Earl has been Vice President-Engineering since 1989. Prior to
that, he served as Director of Engineering for Jones Spacelink, Ltd. from 1987
to 1989 and was a Division Engineer with Jones Intercable, Inc. with
responsibility for 17 systems from 1985 to 1987. From 1972 to 1985, Mr. Earl
held various technical positions with Teltron Cable TV. Mr. Earl has over 25
years of experience in the cable television industry.
J. Paul Morbeck joined the Company as Regional Manager in 1987, became a
Vice President in 1992 and became Senior Vice President - Operations in 1996.
51
<PAGE>
From 1975 to 1987, Mr. Morbeck served in various positions in the cable
television industry including Director of Operations for a Warner Amex cable
division, District Manager for Group W Cable Company, and System Manager at
Warner Cable Communications Inc. Mr. Morbeck has 29 years of experience in the
cable television industry.
Richard H. Churchill, Jr. has been a director of the Company since December
1996. Mr. Churchill is a partner of Media/Communications Partners, a
Boston-based risk capital firm founded in 1986 which specializes in making
private investments in the media, communications and telecommunications
industries ("M/C Partners"). Mr. Churchill is a founding partner of M/C Partners
and has concentrated his investment activities in the cable television and radio
industries. Prior to his joining M/C Partners, Mr. Churchill was a partner at TA
Associates, which he joined in 1978. Mr. Churchill is a graduate of Harvard
Graduate School of Business (1978) and Dartmouth College (1974).
Russell A. Belinsky has been a director of the Company since May 1997. Mr.
Belinsky has been the Managing Director of Chanin Kirkland Messina LLC ("CKM"),
a specialty investment banking firm, since February 1998. From 1990 through
January 1998 Mr. Belinsky was the Managing Director of Chanin and Company LLC
(the predecessor company to CKM), which he co-founded. He currently is a member
of the Board of Directors of Plaid Pantries, Inc., a convenience store chain.
See "Item 13. Certain Relationships and Related Transactions."
Jarlath A. Johnston has been a director of the Company since December
1996. Since 1994, Mr. Johnston has been an independent consultant providing
advice on media financings and restructurings. From 1986 to 1990, Mr.
Johnston served as a Vice President and from 1990 to 1994 as a Director in
the Investment Bank Media Group at Salomon Brothers Inc. From 1984 to 1986,
Mr. Johnston was a Vice President in the Media Division of Bankers Trust
Company, and from 1980 to 1984 he worked in corporate lending positions at
Citibank, N.A.
Board of Directors
Composition of the Board of Directors. The Company's Amended and Restated
Articles of Incorporation (the "Articles of Incorporation") provide that the
Board of Directors will consist of five members, two who are considered to be
Class A Common Stock directors, two who are considered to be Class C Common
Stock directors (until such stock is converted into Class A Common Stock, at
which time there will be four Class A Common Stock directors) and one who is
considered to be a Class B Common Stock director. Directors are elected
annually. As of April 10, 1998, Messrs. Armstrong and Flanagan serve as Class A
Common Stock directors, Mr. Churchill serves as the Class B Common Stock
director and Messrs. Belinsky and Johnston serve as Class C Common Stock
directors.
Special Provisions Regarding Board Action. Except as otherwise provided in
the Articles of Incorporation or below, an act of a majority of the members of
the Board of Directors present at any meeting at which a quorum is present
constitutes Board authorization. Notwithstanding the foregoing, the Articles of
Incorporation provide that an affirmative vote of four of the Company's five
directors is required for Board authorization regarding the following Company
52
<PAGE>
actions: incurrence of significant additional debt; extraordinary capital
expenditures; the declaration of any dividend; the commencement of a voluntary
case under the Bankruptcy Code or any similar bankruptcy or insolvency
proceeding; or the consent of an involuntary petition for relief. In addition,
the Class C Common Stock directors have the sole responsibility to make
decisions on behalf of the Board of Directors with respect to the early
termination of the Management Agreement as a result of a breach thereof, the
selection of a new manager upon such termination, and whether the Management
Agreement will be renewed at the end of its term.
53
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation
The Company's Chief Executive Officer and other executive officers, other
than J. Paul Morbeck, have not earned or been paid or awarded any plan or
non-plan compensation by the Company for services rendered for the year ended
December 31, 1997. Each of such persons are paid by an affiliate of the Manager
for services rendered to the Company. Pursuant to the Management Agreement, the
Manager is paid a management fee (and the Additional Management Fee upon the
satisfaction of certain conditions) by the Company in connection with the
management and operation of the Company's systems. See "Item 10. Directors and
Executive Officers - General - Manager" and "Item 13. Certain Relationships and
Related Transactions."
The following table sets forth compensation awarded to, earned by and paid
to the Company's Chief Executive Officer and each other executive officer of the
Company whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company for the year ended December 31, 1997 (collectively the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal Position Year Salary Bonus Other All Other
--------------------------- ---- ------ ----- Annual Compensation
Compensation ------------
------------
Annual Compensation
-------------------
<S> <C> <C> <C> <C> <C>
Bruce A. Armstrong (1) ................ 1997 - - - -
President and Chief Executive Officer
J. Paul Morbeck ....................... 1997 $125,711 $ 13,000(2) - $ 125(3)
Senior Vice President-Operations
</TABLE>
(1) Bruce A. Armstrong, the Company's President and Chief Executive Officer
is the sole stockholder of the Manager. See "Item 12. Security
Ownership of Certain Beneficial Owners and Management,", "Item 10.
Directors and Executive Officers of the Registrant -General - Manager"
and "Item 13. Certain Relationships and Related Transactions."
(2) Such bonus was based upon Mr. Morbeck's performance in 1996 but was
paid by the Company in 1997.
(3) Reflects the amount contributed to the Company's 401(k) plan benefiting
Mr. Morbeck.
In the year ended December 31, 1997, the Company did not grant options to
purchase Common Stock to any Named Executive Officer and none of such persons
exercised any such options.
There are no employment agreements between the Company and its executive
officers. See "Severance Agreement."
54
<PAGE>
Severance Agreement
The Company and Mr. Morbeck entered into a severance agreement, dated as of
September 1, 1994 (the "Severance Agreement"), which, among other things,
provides that if Mr. Morbeck's employment with the Company is terminated within
one year of and as a result of a Change of Control (as defined therein) and such
termination is not a Termination With Cause (as defined therein) or as a result
of a disability, the Company will pay Mr. Morbeck's monthly salary at the
highest rate in effect during the twelve months prior to the date of
termination, for a period of up to twelve months, the cash value of any accrued
and unused vacation time and the costs, during such period, of Mr. Morbeck's
continued coverage under the Consolidated Omnibus Budget Reconciliation Act of
1985.
In addition, the Severance Agreement provides that in the event that Mr.
Morbeck is terminated by the Company for any other reason, other than a
Termination With Cause or as a result of a disability, the Company will pay his
monthly salary at the highest rate in effect during the twelve months prior to
the date of termination, for a period equal to one month for each completed year
of employment with the Company and the cash value of any accrued and unused
vacation time.
Director Compensation
Pursuant to the Plan of Reorganization, the Company is required to pay each
director a monthly fee of $2,500, other than: (a) any director who is either a
member of the official creditors' committee (or an officer, employee or
affiliate of such member); (b) an officer, employee or affiliate of the Manager
or (c) an officer, employee or affiliate of a holder of the Junior PIK Notes
(including the Class B Common Stock). Messrs. Belinsky and Johnston are the only
directors who are currently entitled to receive monthly fees. All directors are
reimbursed by the Company for reasonable out-of-pocket expenses incurred in
performing their duties as directors. See "Item 1. Business -Bankruptcy
Proceedings" and "Item 10. Directors and Executive Officers of the Registrant."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has three classes of common stock, par value $0.10 per share
(collectively, the "Common Stock"), issued and outstanding. The following table
sets forth certain information regarding the ownership of each class of Common
Stock and, except for the election of directors and other matters referred to
below in this Form 10-K, the total voting power of the outstanding Common Stock,
as of April 10, 1998, by: (i) each person known by the Company to own
beneficially more than five percent of any class of outstanding Common Stock;
(ii) each director of the Company; and (iii) all executive officers and
directors of the Company as a group (9 persons). Pursuant to a pledge agreement,
dated as of December 18, 1996, by and among all of the record holders of the
Company's issued and outstanding shares of Common Stock and Finova, individually
and as agent for the lenders (collectively, the "Lenders") under the Loan
Agreement, as amended by the amended and restated pledge agreement, all of such
shares have been pledged to the Lenders as collateral for the Company's
obligations under the Loan Agreement. In addition, pursuant to the terms of the
Management Agreement the Manager must deposit the 1,000 shares of Class A Common
Stock it holds with the Depositary (and divest itself of its legal ownership
thereof) in the event the Management Agreement is
55
<PAGE>
terminated as a result of (i) an "event of default" (as defined therein) or
(ii) a failure of a "transaction event" to occur by January 1, 2000. For
additional information concerning the Management Agreement and the pledge,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," and "Item 10.
Directors and Executive Officers of the Registrant - General -Manager".
<TABLE>
<CAPTION>
Name Number Percent Number Percent Number Percent Percent of
---- of Shares of Class of Shares of Class of Shares of Class Total
--------- --------- --------- -------- --------- -------- Voting Power
------------
Class A Class B Class C
Common Stock(1) Common Stock(2) Common Stock(3)
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allstate Insurance
Company(4) ............... -- -- 7,999 33.3 -- -- 24.6
State Street Bank, as
depositary(5) ......... -- -- -- -- 75,000 100% 23.1
Scott Cable Management
Company, Inc.(6) ...... 1,000 100% -- -- -- -- 3.1
Bruce A. Armstrong(7) .... -- -- -- -- -- -- --
John M. Flanagan, Jr ..... -- -- -- -- -- -- --
J. Paul Morbeck .......... -- -- -- -- -- -- --
Richard H. Churchill, .... -- -- 14,801 61.7 -- -- 45.5
Jr.(8)(9)
Russell A. Belinsky(10) .. -- -- -- -- -- -- --
Jarlath A. Johnston ...... -- -- -- -- -- -- --
David Croll(8)(11) ....... -- -- 15,226 63.4 -- -- 46.8
Stephen Gormley(8)(12) ... -- -- 14,801 61.7 -- -- 45.5
James Wade(8)(13) ........ -- -- 14,801 61.7 -- -- 45.5
All executive officers and
directors as a group
(9 persons)(7)(8)(9) .. -- -- -- -- -- -- --
</TABLE>
(1) Each share of Class A Common Stock generally has ten votes per share.
The holders of Class A Common Stock, voting as a separate class, are
entitled to elect two of the Company's five directors, except as
otherwise described herein. No share of Class A Common Stock may be
transferred until all of the shares of Class C Common Stock have been
converted into shares of Class A Common Stock pursuant to the Company's
Amended and Restated Articles of Incorporation, except as otherwise
provided in the Management Agreement.
(2) Each share of Class B Common Stock generally has ten votes per share.
The holders of Class B Common Stock, voting as a separate class, are
entitled to elect one of the Company's five directors.
(3) Each share of Class C Common Stock generally has one vote per share.
The holders of Class C Common Stock, voting as a separate class, are
entitled to elect two of the Company's five directors. Each share of
Class C Common Stock will automatically convert into one share of Class
A Common Stock upon the earlier of December 31, 1999 or a "transaction
event" (as described below). The beneficial ownership of the Class C
Common Stock is transferable only with the proportional share of the
Senior PIK Notes issued to the holders under the Plan of
Reorganization.
(4) The address of Allstate Insurance Company is 3075 Sanders Road,
Northbrook, Illinois 60062.
56
<PAGE>
(5) Pursuant to the terms of the deposit agreement, dated as of December
18, 1996 (the "Deposit Agreement"), by and among the Company, Fleet
National Bank, as depositary, and Fleet National Bank, as trustee for
holders (the "Holders") of the Senior PIK Notes, as subsequently
assigned by Fleet to State Street Bank (the "Depositary") in November
1997, the Depositary is the record holder of the 75,000 shares of Class
C Common Stock on behalf of the Holders, and not as principal, as well
as the Senior PIK Notes and the Holders are entitled to depositary
receipts evidencing ownership of such securities. Accordingly, the
Depositary has no obligation to vote such shares other than pursuant to
the written instructions of the Holders in accordance with such
agreement. The Depositary disclaims beneficial ownership of the 75,000
shares of Class C Common Stock held by it pursuant to the Deposit
Agreement. The mailing address of State Street Bank is Two
International Place, Fourth Floor, Boston, Massachusetts 02110.
(6) The Company and the Manager have entered into a management agreement,
dated December 18, 1996, pursuant to which the Manager acts as the
manager, supervisor and operator of the Company's cable television
systems and directs all actions with respect to operations and
management other than extraordinary decisions. The Manager is the
registered owner of 1,000 shares of the Company's Class A Common Stock.
See "Item 10 . Directors and Executive Officers of the Registrant -
General - Manager".
(7) Mr. Bruce A. Armstrong, the Company's President and Chief Executive
officer, is the sole stockholder of the Manager and may be deemed to
beneficially own the shares of Class A Common Stock held by the
Manager. See "Item 10. Directors and Executive Officers of the
Registrant - General".
(8) Includes Shares held of record by Media/Communications Partners Limited
Partnership ("Media Partners"), Chestnut Street Partners, Inc.
("Chestnut Street Partners"), Milk Street Partners, Inc. ("Milk Street
Partners") and TA Investors. Such entities hold 13,920, 665, 240 and
641 shares, respectively, of the Class B Common Stock, representing an
aggregate of 47.6% of the combined voting power of the Company's Common
Stock. Media Partners is a limited partnership. Mr. Richard H.
Churchill, a director of the Company, Mr. David Croll, Mr. Stephen
Gormley and Mr. James Wade are general partners of a limited
partnership which controls Media Partners. Mr. Croll is the sole
stockholder of Chestnut Street Partners. Messrs. Churchill, Gormley and
Wade are stockholders of Milk Street Partners and can control the
affairs of such entity when voting together as a group. TA Investors is
a general partnership of which Media Partners is a partner.
(9) Mr. Richard H. Churchill, Jr., a director of the Company, is an
indirect equity holder in Media Partners, a stockholder of Milk Street
Partners and a partner of TA Investors and may be deemed to share
beneficial ownership of the shares of Class B Common Stock held by each
of such respective entities. Mr. Churchill is neither a stockholder nor
a director of Chestnut Street Partners. The business address of Mr.
Churchill is 75 State Street, Suite 2500, Boston, Massachusetts 02109.
57
<PAGE>
(10) Mr. Russell A. Belinsky, a director of the Company, is a Managing
Director of Chanin Kirkland Messina LLC. See "Item 1. Business -
Bankruptcy Proceedings", "Item 10. Directors and Executive Officers of
the Registrant" and "Item 13. Certain Relationships and Related
Transactions."
(11) Mr. David Croll is an indirect equity holder in Media Partners and a
partner of TA Investors and may be deemed to share beneficial ownership
of the shares of Class B Common Stock held by each of such respective
entities. Mr. Croll is also the sole stockholder of Chestnut Street
Partners and may be deemed to beneficially own the shares of Class B
Common Stock held by such entity. The business address of Mr. Croll is
75 State Street, Suite 2500, Boston, Massachusetts 02109.
(12) Mr. Stephen Gormley is an indirect equity holder in Media Partners, a
stockholder of Milk Street Partners and a partner of TA Investors and
may be deemed to share beneficial ownership of the shares of Class B
Common Stock held by each of such respective entities. Mr. Gormley is
neither a stockholder nor a director of Chestnut Street Partners. The
business address of Mr. Gormley is 75 State Street, Suite 2500, Boston,
Massachusetts 02109.
(13) Mr. James Wade is an indirect equity holder in Media Partners, a
stockholder of Milk Street Partners and a partner of TA Investors and
may be deemed to share beneficial ownership of the shares of Class B
Common Stock held by each of such respective entities. Mr. Wade is
neither a stockholder nor a director of Chestnut Street Partners. The
business address of Mr. Wade is 75 State Street, Suite 2500, Boston,
Massachusetts 02109.
58
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following is a discussion of certain transactions entered into by the
Company and its principal stockholders, executive officers and directors. The
Company believes that the terms of these transactions were no less favorable to
the Company than would have been obtained from non-affiliated third parties for
similar transactions at the time of such transactions. The Company's current
policy is that all transactions between the Company and its directors, officers
and principal stockholders should be on terms no less favorable to the Company
than could be obtained from unaffiliated parties.
Bruce A. Armstrong, the Company's President and Chief Executive Officer, is
the sole stockholder of the Manager. Pursuant to the Management Agreement, the
Manager acts as the manager, supervisor and operator of the systems and directs
all actions concerning operations and management other than extraordinary
decisions. Pursuant to the terms of the Management Agreement, the Company is
required to pay the Manager a management fee equal to 4.25% of the Company's
gross revenues (as defined in the agreement) and, subject to the satisfaction of
certain conditions, an Additional Management Fee of 0.25% of gross revenues.
Whether the Manager is entitled to receive the Additional Management Fee is
determined at the end of the year based on differences between actual and
projected operating cash flow for that year. See Item 10. "Directors and
Executive Officers of the Registrant General - Manager." The Company is also
required to reimburse the Manager for its reasonable out-of-pocket expenses up
to a maximum of $300,000 per year, unless such additional expense reimbursement
has been otherwise approved. The Management Agreement expires on December 31,
1999, unless it is terminated earlier in accordance with its terms. For the
years ended December 31, 1995, 1996 and 1997 the Company has paid the Manager
$1,264,000, $1,340,000 and $1,453,000 respectively, for services rendered
pursuant to the Management Agreement or a prior management agreement. The amount
paid for 1997 included an Additional Management Fee. Under the prior management
agreement between the Company and the Manager, the Manager was paid a management
fee equal to 4.5% of the Company's total revenues.
Pursuant to the Plan of Reorganization, the Manager received 1,000 shares
of Class A Common Stock for incentive purposes. No monetary consideration was
received by the Company in connection with the issuance of the 1,000 shares of
Class A Common Stock. The issuance of the shares was in accordance with the
terms of the Plan which was approved by the Bankruptcy Court on December 18,
1996.
The Company arranges for some of its programming through American Cable
Entertainment Programming Company, Inc. ("AmPro"). Bruce A. Armstrong, the
Company's President and Chief Executive Officer, is the sole stockholder of
AmPro. The Company does not pay any compensation to AmPro in connection with
this arrangement.
In March 1996, Chanin and Company LLC ("Chanin") was retained by the
Official Committee of Unsecured Creditors (the "Committee") as its financial
advisor in connection with the Company's proceedings before the Bankruptcy
Court. Russell A. Belinsky, a director of the Company, is a Managing Director of
Chanin. Pursuant to the engagement letter, the Company agreed to pay Chanin
59
<PAGE>
a monthly advisory fee of $50,000, plus the sum of $250,000 in connection with
the confirmation of the Plan of Reorganization. The Company was also required to
reimburse Chanin for all reasonable out-of-pocket expenses. The Company paid
Chanin $882,724 in fees and expenses and the Company believes that such amounts
represent payment in full for Chanin's services.
For further information concerning certain arrangements between the Company
and its directors and executive officers, see "Item 12. Security Ownership of
Certain Beneficial Owners and Management," "Item 10. Directors and Executive
Officers of the Registrant" and "Item 11. Executive Compensation."
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
(a) Index of Financial Statements
A listing of the consolidated financial statements, notes and
independent auditors' report is included in Part II "Item 8:Financial Statements
and Supplementary Data".
(b) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts..................... 63
All other schedules are omitted because they are not applicable, not
required or the information is included in the consolidated financial statements
or notes thereto.
(c) Reports on Form 8-K
No reports were filed on Form 8-K by the Company during the fourth
quarter of 1997.
(d) Exhibits required to be filed by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit Exhibit Title
Number -------------
- -------
<S> <C>
2.1 Debtors' Second Amended Joint Plan of Reorganization dated October 31,
1996 (incorporated herein by reference to Exhibit 2.1 to the Company's
Form 10, as amended, as filed with the Securities and Exchange
Commission in May, 1997 (the "Form 10")).
3.1 Amended and Restated Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 to the Company's Form 10).
3.2 Bylaws (incorporated herein by reference to Exhibit 3.2 to the
Company's Form 10).
4.1 Form of certificate of Class A Common Stock (incorporated herein by
reference to Exhibit 4.1 to the Company's Form 10)
10.1 Loan Agreement dated December 18, 1996 between Scott Cable
Communications, Inc. and Finova Capital Corporation (incorporated
herein by reference to Exhibit 10.1 to the Company's Form 10).
10.2 Subordination Agreement dated as of December 18, 1996 among Fleet
National Bank, as Trustee, Fleet National Bank, as Trustee, Scott Cable
Communications, Inc. and Finova Capital Corporation (incorporated
herein by reference to Exhibit 10.2 to the Company's Form 10).
10.3 Security Agreement dated as of December 18, 1996 between Scott Cable
Communications, Inc. and Finova Capital Corporation (incorporated
herein by reference to Exhibit 10.3 to the Company's Form 10).
10.4 Form of Amended and Restated Pledge Agreement dated as of February 1997
among Scott Cable Management Company, Inc., Media/Communications
Partners Limited Partnership, Chestnut Street Partners, Inc., Milk
Street Partners, Inc., TA Investors, Northeast Ventures II, Allstate
Insurance Company, Fleet National Bank,
61
<PAGE>
as Trustee, and Finova Capital Corporation (incorporated herein by
reference to Exhibit 10.4 to the Company's Form 10).
10.5 Indenture dated as of December 18, 1996 between Scott Cable
Communications, Inc. and Fleet National Bank, as Trustee (with respect
to the 15% Senior Subordinated Pay-In-Kind Notes due March 18, 2002
(the "Senior PIK Notes")) (incorporated herein by reference to Exhibit
10.5 to the Company's Form 10).
10.6 Deposit Agreement dated as of December 18, 1996 between and among Scott
Cable Communications, Inc., Fleet National Bank and Fleet National
Bank, as Trustee (incorporated herein by reference to Exhibit 10.6 to
the Company's Form 10).
10.7 Subordination Agreement dated as of December 18, 1996 among Fleet
National Bank, as Trustee, Fleet National Bank, as Trustee, and Scott
Cable Communications, Inc. (with respect to the Senior PIK Notes
(incorporated herein by reference to Exhibit 10.7 to the Company's Form
10).
10.8 Security Agreement dated as of December 18, 1996 between Scott Cable
Communications, Inc. and Fleet National Bank, as Trustee (with respect
to the Senior PIK Notes (incorporated herein by reference to Exhibit
10.8 to the Company's Form 10).
10.9 Indenture dated as of December 18, 1996 between Scott Cable
Communications, Inc. and Fleet National Bank, as Trustee (with respect
to the 16% Junior Subordinated Pay-In-Kind Notes due July 18, 2002 (the
"Junior PIK Notes")) (incorporated herein by reference to Exhibit 10.9
to the Company's Form 10).
10.10 Security Agreement dated as of December 18, 1996 between Scott Cable
Communications, Inc. and Fleet National Bank, as Trustee (with respect
to the Junior PIK Notes (incorporated herein by reference to Exhibit
10.10 to the Company's Form 10).
10.11 Management Agreement dated December 18, 1996 between Scott Cable
Communications, Inc. and Scott Cable Management Company, Inc.
(incorporated herein by reference to Exhibit 10.11 to the Company's
Form 10).
10.12 Escrow Agreement dated November 15, 1995 by and between Scott Cable
Communications, Inc. and Baer Marks & Upham LLP (incorporated herein by
reference to Exhibit 10.12 to the Company's Form 10).
10.13 Amendment No.1 to Escrow Agreement dated March 15, 1997 by and between
Scott Cable Communications, Inc. and Baer Marks & Upham LLP
(incorporated herein by reference to Exhibit 10.13 to the Company's
Form 10).
10.14 Escrow Agreement dated as of December 18, 1996 by and among CIG & Co.,
Metropolitan Life Insurance Company, Scott Cable Communications, Inc.
and First Union Bank of Connecticut (incorporated herein by reference
to Exhibit 10.14 to the Company's Form 10).
10.15 Severance Agreement dated as of September 1, 1994 by and between Scott
Cable Communications, Inc. and J.P. Morbeck (incorporated herein by
reference to Exhibit 10.15 to the Company's Form 10).
11.1 Statement regarding computation of per share earnings. (Not included as
the computation can be clearly determined from the material contained
in the registration statement.) (incorporated herein by reference to
Exhibit 11.1 to the Company's Form 10).
21.1 Subsidiaries of the Company (incorporated herein by reference to
Exhibit 21.1 to the Company's Form 10)
27.1 Financial Data Schedule.
</TABLE>
62
<PAGE>
SCHEDULE II
SCOTT CABLE COMMUNICATIONS, INC.
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning of Charged to other Deductions end of
Description (2) period expense accounts describe period
--------------- ------------ ---------- ---------- ---------- ----------
Column C
Column A Column B Additions Column D Column E
-------- -------- --------- -------- --------
(1)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1995 $ 48,715 $304,484 $249,504 $103,695
Year ended December 31, 1996 103,695 310,584 308,398 105,881
Year ended December 31, 1997 105,881 511,153 464,733 152,301
</TABLE>
(1) Uncollectible accounts written off
(2) The deferred tax asset valuation allowance has been omitted from this
schedule because the required information is shown in the notes to the
financial statements.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SCOTT CABLE COMMUNICATIONS, INC.
April 14, 1998
By: /s/ Bruce A. Armstrong
------------------------
Bruce A. Armstrong
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on April 14, 1998:
/s/ Bruce A. Armstrong
---------------------- Chairman, President and Chief
Bruce A. Armstrong Executive Officer (principal
executive officer)
/s/ John M. Flanagan, Jr.
------------------------- Senior Vice President, Chief
John M. Flanagan, Jr. Financial Officer (principal
financial officer) and Director
/s/ Steven C. Fox
--------------------- Vice President - Finance (principal
Steven C. Fox accounting officer)
/s/ Russell A. Belinsky
----------------------- Director
Russell A. Belinsky
/s/ Jarlath A. Johnston
----------------------- Director
Jarlath A. Johnston
64
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,821,365
<SECURITIES> 0
<RECEIVABLES> 531,374
<ALLOWANCES> (152,301)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 40,566,121
<DEPRECIATION> (23,084,031)
<TOTAL-ASSETS> 59,607,745
<CURRENT-LIABILITIES> 0
<BONDS> 164,428,668
0
0
<COMMON> 10,000
<OTHER-SE> (117,187,720)
<TOTAL-LIABILITY-AND-EQUITY> 59,607,745
<SALES> 0
<TOTAL-REVENUES> 32,287,116
<CGS> 0
<TOTAL-COSTS> 26,828,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,573,419
<INCOME-PRETAX> (15,115,047)
<INCOME-TAX> (10,332,352)
<INCOME-CONTINUING> (4,782,695)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,782,695)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
